2020/2021 Employee Retention Credit: The Expanded Eligibility and Increased Credit Opportunities

The Employee Retention Credit for 2020 and 2021 has been expanded. 

Now, wages eligible for the credit are increased, the group of Eligible Employers is expanded, and the credit rate applied to Qualified Wages is increased.

The employers currently eligible for an Employee Retention Credit include PPP borrowers and, for 2021, government colleges and universities, as well as government employers whose principal purpose is providing medical or hospital care.

Eligibility Requirements

This payroll credit applies to employers of any size that have had a partial or full suspension of operations because of an order from a governmental authority limiting commerce, travel, or group meetings due to COVID-19 (the “Government Mandate Rules”) or a significant decline in gross receipts (the “Gross Receipts Test”). If an employer is eligible under the Government Mandate Rules, the credit is available for Qualified Wages paid while the mandate is in place.

A significant decline in gross receipts effective for 2021 is a decline greater than 20 percent when gross receipts from the first or second quarter of 2021 are compared to gross receipts in the corresponding quarter in 2019. Also, for 2021, employers can also apply the Gross Receipts Test by using the immediately preceding calendar quarter. Thus, under this elective rule, instead of comparing Q1 2021 gross receipts with those of Q1 2019, a taxpayer can elect to compare gross receipts from Q4 2020 to gross receipts from Q4 2019 to be defined as an Eligible Employer. While the election is operative, clarification is required as to how or when to make it. It is likely, however, that the election will be made by checking a box on Form 941 where the credit is claimed.

For 2020, that rule required a 50 percent decline in gross receipts, and Eligible Employer status continued for every subsequent quarter until the quarter following the quarter in which that comparison reached 80 percent. The 2020 year comparison is with 2019 quarters in determining the 50 percent and 80 percent of sales numbers.

Applies to Broader Range of Qualified Wages

The new law not only loosens the decline in gross receipts standard in order to qualify as an Eligible Employer but also allows PPP borrowers to claim these credits for Qualified Wages that were not used for loan forgiveness. This provision applies to 2020 and 2021 wages; therefore, PPP loan borrowers and those who did not take advantage of PPP loans will want to determine if they are Eligible Employers for purposes of the Employee Retention Credit. Most PPP borrowers will have wages more than what was or will be used for loan forgiveness and therefore qualify for the credit. It is important to note that eligible employers can go back to 2020 to claim the credit utilizing the incremental wages not used for the computation of the PPP loan. For 2020 wages paid by a PPP borrower who is an Eligible Employer, the credit for all wages in 2020 can be claimed on the Q4 2020 Form 941, avoiding the need for an amended Form 941 for earlier 2020 quarters.

For wages paid between March 13, 2020, and December 31, 2020, the Employee Retention Credit is a payroll tax credit equal to 50 percent of up to $10,000 in wages and health benefits paid to certain employees of Eligible Employers. The law notes that health benefits must be group health plans. For credits in 2020, Qualified Wages for Eligible Employers averaging 100 or fewer full-time employees in 2019 are all wages and group health plan benefits paid up to the $10,000 limit. For Eligible Employers with more than 100 full-time workers in 2019, Qualified Wages for credits in 2020 are wages and group health plan benefits paid to workers who are not providing services due to partial or full suspension or the decline in gross receipts.

Special Provisions for Wages Paid in First Six Months of 2021

For wages paid from January 1, 2021, through June 30, 2021, the Employee Retention Credit becomes even more beneficial: The credit amount is increased to 70 percent, and the wage limit is increased to $10,000 per quarter, per employee. In addition, Qualified Wages are any wages paid by an Eligible Employer with 500 or fewer employees, determined on a controlled group basis. Qualified Wages for an employer with more than 500 employees are wages paid to employees for not providing services.

The credit is claimed by reducing payroll tax deposits, which allows an employer to realize immediate cash flow benefits, or may be claimed on an amended Form 941. In addition, for credits claimed in 2021 by employers that have 500 or fewer employees, the employer can elect to receive an advance credit not to exceed 70 percent of average quarterly wages paid by the employer in 2019. Special rules apply for seasonal employers, allowing them to look to the 2019 calendar quarter corresponding to the calendar quarter of the credit.

Taxpayers need to determine if they have had a suspension of operations or a significant decline in gross receipts as soon as possible to determine if they can benefit from this credit in 2020 or 2021 and realize the cash flow benefits.