Fernway DiarySM

Feb 11, 2021

Companies in the US may be able to lower their Federal quarterly payroll tax bill this year. A new law was passed that clarifies and expands on the Employee Retention Credit under the previously enacted CARES Act. Key changes include an extension of the Employee Retention Credit into 2021, along with a reduced gross receipts reduction threshold required to determine eligibility.

Consolidated Appropriations Act vs CARES Act

The Consolidated Appropriations Act, 2021, was signed into law on December 27, 2020. This new law clarifies and expands on the Employee Retention Credit previously enacted under the CARES Act.

The CARES Act was originally limited to qualified wages paid after March 12, 2020, and before January 1, 2021. The Consolidated Appropriations Act now applies through July 1, 2021. Both Acts extend their benefits to businesses with operations that were either fully or partially suspended by a COVID-19 governmental order and during the period the order was in force.

The Consolidated Appropriations Act extends the Employee Retention Credit to businesses whose gross receipts are less than 80{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} of gross receipts during the same quarter in 2019 (compared to the 50{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} threshold set under the CARES Act). In both scenarios, businesses that were not in existence in 2019 may be able to use a comparison against 2020 for purposes of this credit.

Under the CARES Act, the Employee Retention Credit was limited to 50{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} of qualified wages paid to an employee, plus the cost to continue providing health benefits. Under the new law, the credit has been extended to 70{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} of qualified wages. Also, the previous cap of $5,000 per employee has been increased to $7,000 per employee per quarter.

The size of a business that qualifies for the Employee Retention Credit has also been modified under this new Act. Previously, companies with more than 100 employees would not be eligible for this credit – now that number has increased to 500 employees (aggregated to include affiliated companies with more the 50{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} common ownership).

PPP Loan

Under the CARES Act, a company that received a Paycheck Protection Program (PPP) loan was ineligible to claim the Employee Retention Credit. This has been repealed with the change retroactive to the effective date under the original law for wages paid after March 12, 2020. However, the credit cannot be claimed for wages paid with proceeds of a PPP loan that has been forgiven. The IRS is expected to issue further guidance on procedures to claim this credit retroactively.

Employee Retention Credits are a payroll tax credit that reduces the Federal tax liabilities owed by businesses in the US. Both the CARES Act and the Consolidated Appropriations Act were designed to help businesses weather the financial storm created by the COVID-19 pandemic. The unprecedented stress on the economy has left many businesses struggling to survive through an indefinite future. Fernway Solutions is committed to helping businesses navigate ever-changing legal and economic complexities by partnering with our clients and providing expert advice personalized to their needs.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com

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