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The Employee Retention Tax Credit, 2020 Vs. 2021

The Employee Retention Credit (ERC) was introduced in March 2020 by the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act). The Consolidated Appropriations Act, 2021 (“CAA”), both retroactively modified the Old ERC and introduced a new ERC (the “New ERC”), effective January 1, 2021. 

These changes increase the amount of relief available and the types of eligible businesses

ERC — Then (under the CARES Act)

The Old ERC was made available by the CARES Act to employers whose businesses either were (a) fully or partially suspended, or (b) had significant reductions in gross receipts. The Old ERC could be up to $5,000 per employee for qualified wages paid during the period from March 12, 2020, through the end of 2020. The Old ERC is economically realized by reducing quarterly tax deposits, and to the extent this reduction is not sufficient, the employer can file a Form 7200 and request a tax refund, or amend its Form 941 by filing a Form 941-X.

2021- ERC — Now (under the CAA)

The New ERC applies for wages paid beginning January 1, 2021, and ending June 30, 2021:

  • The applicable credit percentage is increased from 50 percent to 70 percent of qualified wages.
  • The limit on per-employee qualifying wages is increased from $10,000 for the year to $10,000 per quarter. Together with the previous bullet, the maximum credit for 2021 is therefore $14,000 per employee.
  • The eligibility threshold tied to revenue decline is decreased from 50 percent to 20 percent, and employers may now calculate that by comparing the quarter affected by the pandemic to the previous matching calendar quarter.
  • The Old ERC imposed a cap by limiting “qualified wages” to no more than the monthly amount earned during the prior 30-day period. The New ERC removes this cap and appears to allow employers to temporarily increase wages or pay bonuses in order to maximize the New ERC.
  • The “large employer” threshold is increased to 500 employees, from 100 employees under the CARES Act.

Lack of Guidance

While these changes present greater benefits to more employers, and better planning opportunities, it is important to remember that we still have no formal guidance in this area. Rather, the Internal Revenue Service (“IRS”) has only issued Frequently Asked Questions (“FAQs”), which not only do not have precedential value, but are not binding on the IRS and, as we have seen over the past year, are subject to frequent changes. Thus tax planning involving these provisions should be done with caution and with experienced tax counsel.

Namely does not provide legal, accounting, or tax advice. Please consult with professional counsel for any tax, accounting or legal questions.

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