Updated Jan 04, 2021
The Consolidated Appropriations Act, 2021 signed into law on Sunday 12-27-2020 included what is referred to by some as an additional COVID-19 relief package. It modifies many aspects of various Covid-19 regulations and tax credits and thus provides more relief to employers.
While it can be interesting to some.. especially to historians.. to see the changes from the old employee retention credit rules versus the new one, and to those implementing the changes in the software so they change the effected code, it can be confusing to others and is of little to no value to those that never took the employee retention credit. As such, we will be writing this article as a guide to the employee retention credit as it is now, without any reference to how it was before the changes.
If you would like to read how it was before, you can refer to our Employee Retention Credit article that was written prior to the changes made in the Consolidated Appropriations Act, 2021.
As the retention credit stands now, there are differences in the credit eligibility, calculations, and more between the year 2020 and year 2021. Accordingly, we will emphasize in this article which year we are referring to so that you maximize the credit you take for whichever year you are eligible.
A very notable change in The Consolidated Appropriations Act, 2021 is that there is a "retroactive change" on the eligibility of employers that received a PPP and paid enough wages from PPP proceeds. To the extent that they paid wages, not from PPP proceeds, they qualify for the Employee Retention Credit on those wages. Accordingly, employers that find themselves in this situation will want to amend the 941's of previous quarters and claim the credit.
Note: At the time of this writing, not much guidance from the IRS was issued on the revisions added in The Consolidated Appropriations Act, 2021. It is expected that some changes will be made by the IRS. However, we are providing an overview of the program based on the guidance available now. As new guidance from the IRS will be issued, we will update this article.
What Does This Mean for Employers?
Employers can receive a tax credit of 50% of qualifying wages paid up to a total of $10,000 per employee, per year. Wages paid after March 12, 2020, and before Jan 1, 2021, are eligible for the credit. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer-provided health care. In other words, employers can receive a total of 5000.00 in tax credits per employee in the year 2020 (10,000 * 50% = 5,000).
Employers can receive a tax credit of 70% of qualifying wages paid up to $10,000 per employee, per Quarter. Wages paid between Jan 1, 2021 and Dec 31, 2021, are eligible for the credit. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer-provided health care. In other words, employers can receive a total of 28,000 in tax credits per employee in the year 2021 (10,000 * 4 * 70% = 28,000).
Which Wages Qualify?
Employers with up to 100 employees: If the employer had 100 or fewer full-time employees on average during the year of 2019, all wages paid to employees during the "eligibility period" are considered "Qualified Wages"; this includes wages paid to employees for work as well as wages paid for employees while not working.
Employers with more than 100 employees: If the employer had more than 100 full-time employees on average in 2019, "Qualified Wages" are the wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of the employer's business operations by a governmental order, or (2) the business is experiencing a significant decline in gross receipts.
Employers with up to 500 employees: If the employer had 500 or fewer full-time employees on average during the year 2019, all wages paid to employees during the "eligibility period" are considered "Qualified Wages"; this includes wages paid to employees for work as well as wages paid for employees while not working.
Employers with more than 500 employees: If the employer had more than 500 full-time employees on average in 2019, "Qualified Wages" are the wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of the employer's business operations by a governmental order, or (2) the business is experiencing a significant decline in gross receipts.
- Full-time employees are defined as for ACA purposes, that is; employees working 30 hours or more per week or 130 hours per month are considered a full-time employee.
- Unlike ACA, the hours of part-time employees are not counted and aggregated. As such if an employer had less than 100 "Full-Time Employees" they are considered a small employer even if they had an unlimited amount of part-time employees.
- For further details on determining how to determine your company size as well as qualified wages, you might want to read IRS Guidance.
Is my company eligible?
If one of the following 2 scenarios is true, it is eligible:
- Your business is fully or partially suspended by government order due to COVID-19 during a calendar quarter. For further details, you might want to read IRS Guidance.
- The gross receipts of your business are below 50% of the comparable quarter in 2019. For further details, you might want to read IRS Guidance.
- Your business is fully or partially suspended by government order due to COVID-19 during the calendar quarter. For further details, you might want to read IRS Guidance.
- The gross receipts of your business are below 80% (stated otherwise, a 20% or more gross receipt reduction) of the comparable quarter in 2019. For further details, you might want to read IRS Guidance.
Note: In 2021 a company may elect to compare the gross receipt of the most recent quarter to that of the same quarter of 2019. So for example, an employer may compare the gross receipt of Q-4 2020 to the gross receipts of Q-4 2019. If it is less than 80% of what it was in 2019, the employer is eligible for the credit in Q-1 2021.
Are there exceptions?
There are 2 exceptions that employers are to be aware of.
1. PPP Loan Recipients
- While this tax credit is available to any employer regardless of size, it is important to note that if your company has received a loan under the Paycheck Protection Program it may not claim the credit for wages that were paid with the proceeds of a PPP loan.
- Note: Unlike prior to the changes of The Consolidated Appropriations Act, 2021 employers are allowed to have PPP and will still be eligible for this tax credit. The exception is simply that they should not calculate the credit on wages paid from the proceeds of the PPP loan.
2. Family Members of Employer
Wages paid to individuals related to the owner of the company is not entitled to the tax credit.
Accordingly, as you are submitting a request to set up your company with the employee retention credit you should also provide us a list of employee numbers that are to be flagged as not eligible for the employee retention credit.
The definition of related individuals are
- A child or a descendant of a child; A brother, sister, stepbrother, or stepsister; The father or mother, or an ancestor of either; A stepfather or stepmother; A niece or nephew; An aunt or uncle;
A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
- In addition, if the Eligible Employer is a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation.
- If the Eligible Employer is an entity other than a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent of the capital and profits interests in the entity.
For more information on this, see IRS Employee Retention Credit FAQ's.
What steps do I need to take to opt-in and maximize the usage of this tax credit?
- Fill out ERC Opt-In Agreement and make sure to select the type of employer you are, the effective start, and the effective end date (if applicable).
- Fill out the Amendment Agreement if you want us to also amend prior quarters that were already filed prior to your opt-in for this credit.
- Send us a list of employees that are considered a related individual that should be excluded from the Employee Retention Credit.
- Email it to CS@brandspaycheck.com.
- It will be processed, and our customer support department will confirm when your company has been set up.
When do I have to advise Brand's to stop calculating this tax credit?
- If your company qualified because it has been suspended due to a government order, it becomes ineligible for the credit as soon as the government order is lifted. You, therefore, need to notify us to cease calculating the credit as soon as that happens.
- Year 2020: If your company qualified because of the gross receipt reductions, it becomes ineligible in the beginning of the quarter following the end of the quarter in which its gross receipts go above 80% of a comparable quarter in 2019. When that happens, you should notify us so that we cease future tax credit calculations.
- Year 2021: Your eligibility is determined on a quarter by quarter basis, in any quarter that you qualify due to the gross receipt reduction test, you qualify till the end of that quarter. To continue eligibility in any quarter you must meet the gross receipt reduction test for that quarter.
After setting this up, what else do I need to do?
- If you qualified because you have more than 100 employees in the year 2020 or more than 500 employees in the year 2021, you would need to ensure that you distinguish between compensation for work versus compensation while not working, so that we can calculate your taxes accordingly.
- If your company receives accounting exports from us (such as IIF Exports, Fund EZ Export, or any other GL export) be sure to reach out to us and advise us of how your company would like this to be reflected in the export (as there are many different ways you might want to track this).
Where can I read more?
Follow this link: IRS Guidance for a full IRS overview and FAQ’s on the Employee Retention Credit Program.