The Employee Retention Credit, as originally enacted on March 27, 2020 by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. The Taxpayer Certainty and Disaster Tax Relief Act (Relief Act), enacted on December 27, 2020 amended and extended the Employee Retention Credit. On March 1, 2021, the IRS released Notice 2021-20 to provide guidance on the original Employee Retention Credit, as modified by the Relief Act. The Notice is 102 pages and contains detailed frequently asked questions.
As originally enacted, an employer was generally eligible to claim the Employee Retention Credit if the employer did not obtain a Paycheck Protection Program loan and either:
- Had operations that were fully or partially suspended during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experienced a significant decline in gross receipts during the calendar quarter. A significant decline is 50% decline in 2020 over 2019 calendar gross receipts. An employer that has a significant decline continues to be eligible until the end of the calendar quarter in which gross receipts are greater than 80% of its 2019 calendar quarter receipts.
As originally enacted, qualified wages were determined in part based on the size of an employer, and subject to an overall cap of $10,000 per employee for all calendar quarters (effectively capping the 2020 credit at $5,000 per employee). An employer who employed 100 or fewer average full-time employees in 2019 could generally include all wages as qualified wages (but not on wages on which a credit was claimed under the Families First Coronavirus Relief Act paid leave provisions). An employer who employed more than 100 average full-time employees in 2019 could only include wages paid to employees who were not performing services.
The Relief Act retroactively eliminated the restriction that prevented employers who received a Paycheck Protection Program loan from qualifying for the credit. Otherwise eligible employers who paid qualified wages can now retroactively claim the Employee Retention Credit (but not on amounts included as wages for Paycheck Protection Program loan forgiveness). These eligible employers may file a claim for a refund by filing Form 941-X to claim the credit on qualified wages paid in 2020.
While the Relief Act allowed employers who received a Paycheck Protection Program loan that was forgiven to claim a tax deduction for the underlying expenses paid with loan proceeds, the Relief Act did not provide similar treatment for the Employee Retention Credit. An employer that claims the Employee Retention Credit must reduce the expenses it would otherwise claim for qualified wages by the amount of the Employee Retention Credit.
The Relief Act extended and enhanced the Employee Retention Credit for qualified wages paid after December 31, 2020 through June 30, 2021. Under the Relief Act, eligible employers may claim a refundable tax credit against certain employment taxes equal to 70% of the qualified wages an eligible employer pays to employees after December 31, 2020 through June 30, 2021.
During the 2021 time period, an employer is an eligible employer if the employer either:
- Has a full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
- A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50%).
The Relief Act also significantly expands the definition of qualified wages by increasing the employer size threshold from more than 100 full-time employees in 2019 to more than 500 employees in 2019 for purposes of determining qualified wages. Thus, eligible employers with more than 100 but 500 or fewer average full time employees in 2019 can generally claim the credit on all qualified wages, even for employees who are performing services (unlike the 2020 credit). The overall cap on qualified wages remains $10,000 for 2021, but the credit is potentially worth $7,000 per employee (versus $5,000 in 2020) due to the increased percentage taken into account for the credit (70% in 2021 versus 50% in 2020).
The rules applicable to the Employee Retention Credit as summarized above are relatively straight-forward. However, employers must thoroughly analyze their eligibility for the credit by taking into account detailed aggregation rules for sizing purposes, evaluating the nature of government orders if they are relying on order for eligibility, determining the applicable periods of eligibility, and evaluating wages to determine qualification (e.g. health plan expenses can qualify but wages used for Paycheck Protection Program forgiveness do not).