With the introduction of the Consolidated Appropriations Act, 2021, a fresh set of changes have come to the employee retention credit. The employee retention credit is a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that has been updated and expanded to include more businesses. The new law not only expands the scope but also clarifies a few points. Here are the changes small business owners need to be aware of:
The timeframe for credit
The original law outlined the qualified wages paid after March 12, 2020, and before January 1, 2021, to be eligible for the credit. However, the new law clearly expands the window of qualified wages, specifying that those paid after March 12, 2020, and before July 1, 2021, are to be eligible for the credit. Credit availability now covers the first two quarters of 2021.
Eligibility criteria for the credit
The old law stated that businesses that were partially or fully closed due to a COVID-19 lockdown order for any quarter in 2020, could be eligible for employee retention credit provided their gross receipt saw a reduction of less than 50% in comparison to the same quarter in 2019. The new law is the same except from January 1, 2021, the gross receipts can be less than 80% of the same quarter in 2019.
The credit amount
According to the original law, the credit was 50% of the qualified wages paid to an employee. The new law now has expanded the credit to 70% of the qualified wages paid to the employee. This means that previously employers could claim a credit of $5,000 against $10,000 in qualified wages, but now they can claim $7,000 against $10,000 in qualified wages.
Earlier, the maximum credit per employee was capped at $5,000 annually. Starting from January 1, 2021, the limit has been increased to $7,000 per employee for each of the first two quarters of 2021. This means that the maximum per-employee credit against is now a total of $14,000 for the eligible two quarters of 2021.
Employee eligibility for credit
Earlier, companies with more than 100 employees couldn’t qualify for credits. However, starting from January 1, 2021, companies with up to 500 employees are eligible for the credit, whether employees are working remotely or on-site.
PPP loan eligibility
The old law did not allow a company to receive both the Paycheck Protection Program (PPP) loan and employee retention credit. But, according to the new law, a company can now claim a credit against qualified wages even if it had already received the PPP loan. The only condition here is that the company cannot use the forgiven PPP loan amount to pay employee wages and claim credit for it.
The old law didn’t have any mention of advance payments. But in 2021, companies with 500 or fewer employees can get an advance payment of the credit based on 70% of the average quarterly payroll for the same quarter in 2019. If the real credit is less than the advance payment, companies need to reimburse the government.
Disallowance of credit for governmental entities
The employee retention credit was not available for federal, state, or local government entities. But in 2021, entities such as public colleges and universities, organizations focused on providing medical care, and certain federal institutions are eligible.
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Matt Brady, CPA
Image credit: Piqsels @ Creative Commons