Important Changes to the Employee Retention Credit
Updated legislation increases eligibility and enhances some benefits
The Consolidated Appropriations Act, 2021 (CAA), was signed into law on December 27, 2020. Among many changes and updates to the prior legislation for COVID-19, this law clarifies and expands the Employee Retention Credit (ERC) that was created by the CARES Act.
If your business did not previously claim this credit due to eligibility, it may now qualify. Also, if you have previously claimed this credit, you may now be eligible for an enhanced benefit.
General ERC rules under the CARES Act
In general, the ERC under the CARES Act allowed qualified employers to claim a credit of 50% on employee qualified wages paid from March 13, 2020 through December 31, 2020. For purposes of this credit, wages include the employer portion of group health care costs.
The maximum eligible wages per employee are $10,000, resulting in a maximum annual credit of up to $5,000 per employee. To qualify for the credit, an employer must meet all of the following criteria:
- The employer must have carried on a trade or business during calendar year 2020; and
- The operation of that trade or business either:
- Was fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19; or
- Has gross receipts for at least one calendar quarter that are less than 50% of the gross receipts received during the same calendar quarter(s) in the prior year. This period of significant decline in gross receipts is recognized until the end of the 2020 calendar quarter in which gross receipts are greater than 80% of gross receipts of the corresponding calendar quarter in 2019.
2021 CAA Changes to ERC
The ERC was set to expire on December 30, 2020. The CAA extended the ERC for wages paid from January 1, 2021, through June 30, 2021.
Additionally, the ERC eligibility and limits were changed as follows:
- Reduced the quarter over quarter gross receipts decline from 50% to 20%, comparing the 2021 calendar quarter to the corresponding quarter in 2019 (rather than 2020).
- Increased the ERC wage limit to $10,000 per employee per quarter rather than $10,000 per year.
- Increased the ERC percentage from 50% to 70% of gross wages.
- Increased the full time employee limit from 100 to 500.
ERC and the PPP
Borrowers, under the Paycheck Protection Program (“PPP”) will be able to claim ERC. There is a rule that disallows the same wages from being used for both the ERC and PPP proceeds.
KRS professionals are available and happy to assist with loan and forgiveness applications. Visit the KRS Coronavirus Resources Page for additional information. Please contact us if you have any questions, concerns, or need advisement during this unprecedented time.