Expansion of the Employee Retention Tax Credit
In December 2020, Congress passed the Consolidated Appropriations Act (CAA) of 2021. Originally, the CARES Act provided an employee retention tax credit (ERTC) to eligible employers for qualified wages paid after March 12, 2020, and before January 1, 2021. The ERTC was designed to reimburse businesses with lost economics due to the impact of COVID.
To be eligible for the credit, an employer must have experienced a full or partial shut down of operations due to a COVID-19 related government order, or a significant decline in gross receipts (as defined under the CARES Act).
The CAA arrived as many measures were set to expire at the end of 2020. Though the CAA is an extension of the CARES in some ways, there are some key differences. The most significant are changes to the Paycheck Protection Program (PPP) and Employee Retention Tax Credit (ERTC).
ERTC for 2020
- Credit of 50% of qualified wages
- Qualified wages limited to $10,000 per year per employee
- Small employer capped at 100 FTEs in 2019
- Decline in gross receipts threshold at 50% compared to 2019
- Originally under the CARES Act if an employer took a PPP loan they could not take advantage of the ERTC. However, with the passage of the CAA those employers can now participate which creates a lookback opportunity.
ERTC for 2021
- Credit of 70% of qualified wages
- Qualified wages limited to $10,000 per quarter per employee
- Small employer capped at 500 FTEs in 2019
- Decline in gross receipts threshold at 20% compared to 2019
- If had a PPP loan, can claim the ERTC (excluding wages required to obtain forgiveness of a PPP loan).