As 2020 was finally coming to an end, Congress and the White House worked together to pass only the second major economic relief bill since the start of the pandemic. The Consolidated Appropriations Act, 2021, contained a number of important updates designed to help businesses, individuals and families address the persisting challenges. The provisions for businesses included more funds for the Paycheck Protection Program (PPP), the introduction of second draw loans (PPP2), extension of several tax incentives and most notably generous changes to the Employee Retention Tax Credit (ERC) for 2021. The ERC is now extended through December 31, 2021, and the value of the credit has been sharply increased making it a compelling payroll tax savings option. To help clients, prospects, and others, Calvetti Ferguson has provided a summary of key details below.
Total Credit Increase
In 2020, the credit value was limited to 50% of qualified wages with a maximum of $5,000 per employee for the year. For 2021, the credit value is increased to 70% of qualified wages paid in an eligible quarter with a maximum credit of $7,000 per employee, per quarter, with a maximum of $28,000.
Full-Time Employee Changes
Under prior rules, a business that had over 100 full-time employees could only claim the credit on qualifying wages paid to employees who were not providing services, whereas those with less than 100 employees could claim qualifying wages paid even if employees were providing services. For 2021, the total employee count was increased to 500 meaning those with less than 500 employees can claim the credit even for those who are currently providing services.
Gross Receipts Reduction
Previously for a business to qualify there needed to be a 50% reduction in gross receipts in a calendar quarter when compared against the same quarter in 2019. This has changed as the required reduction in gross receipts is now only 20%, determined when a 2021 quarter is compared against the same quarter in 2019. If there is not a 20% reduction, then a business may look at the immediately preceding quarter to make the evaluation.
Full or Partial Shutdown
A business that does not meet the gross receipts reduction may also qualify for the credit if they were subject to a full or partial government shutdown. Businesses will be considered shut down if government orders required them to stop or suspend operations due to COVID 19. Employers may also qualify if their suppliers are required to suspend or shut down operation making it impossible to obtain materials needed to operate. In situations where a physical location is closed, but employees are working remotely, it is not considered shut down for purposes of the credit.
Starting on January 1, 2021, the definition of qualified wages has been expanded to include healthcare costs for those with 100 or fewer employees. For those with more than 100 employees, wages for furloughed employees now include the continuing pay and health care premiums. It is important to note that qualified wages do not include required pay for sick leave, paid family leave or any wages for paid time off for vacations, holidays, sick days, and other days for benefits accrued during a prior period.
Credit Advance Option
New in 2021, small businesses can elect to receive an advance for the expected amount of payroll tax savings. Previously, businesses would calculate the value of the credit and then deduct the amount from the quarter’s payroll taxes paid. This change facilitates the opportunity to receive expected credit amounts earlier and provide businesses with more working capital. However, the advance will need to be reconciled against the actual credit amount. If the advance exceeds the actual amount, then the employer will need to pay the additional payroll taxes in excess of the credit.
Eligibility for PPP Borrowers
For those businesses which received a PPP loan in 2020, claiming the credit was not allowed. However, this has changed as loan recipients can now claim the credit for eligible wages that were not paid for with PPP forgiven loans. This change is retroactive to March 2020 and means certain businesses can claim additional and unexpected savings.
A business is required to provide documentation highlighting credit calculation, the amount of qualified plan expenses allocated to wages, and any information showing the business had suspended operations or suffered a required decline in gross receipts for the quarter. The documentation must be retained for four years and made available for inspection.
The changes to the Employee Retention Tax Credit for 2021 create a compelling payroll tax-saving opportunity for many Houston, Dallas, and Texas businesses. Given the number of changes and complexity of calculations, it is important to consult with a qualified advisor to guide you through the process. If you have questions about the information outlined above or need assistance with a tax compliance or planning need, Calvetti Ferguson can help. For additional information please contact us or complete the form below.