The CARES Act, passed in March 2020, includes a refundable tax credit (to be claimed on payroll Form 941) that is computed on a calendar-quarter basis against the 6.2 percent employer-side Social Security payroll tax for certain employers that experienced either full or partial suspension of operations due to a government order or that sustain a significant decline in gross receipts. This is defined as the first calendar quarter after December 31, 2019 that gross receipts are less than 50 percent of the amount in the corresponding prior-year quarter and ending with the next quarter in which gross receipts exceed 80 percent of the corresponding prior year quarter. The refundable credit was only applicable for wages paid after March 12, 2020, and before January 1, 2021.
Under the CARES Act, this employee retention tax credit (or ERTC) is based on 50 percent of the “qualified wages” (up to $10,000 per employee per year) paid to each employee. The computation of qualified wages depends on whether the employer’s average number of full-time employees during 2019 was more or less than 100.
The ERTC as enacted in the CARES Act is not available to governmental employers but was available to certain nonprofits.
The new legislation in the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 legislation would extend the ERTC through June 30, 2021, and modify the following terms effective January 1, 2021:
- Increase the credit rate from 50 percent to 70 percent of qualified wages.
- Expand businesses eligible for the credit by reducing the required year over year gross receipts decline from 50 percent to 20 percent and providing a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.
- Increase the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter.
- Increase the full-time employee threshold for a business to be treated as a “large employer” (and therefore subject to a restrictive standard for determining the qualified wage base) from 100 to 500 employees.
- Provides rules to allow new employers who were not in existence in 2019 to claim the credit.
- Employers who receive Paycheck Protection Program (PPP) loans are still eligible for the ERTC with respect to wages that are not paid for with forgiven PPP proceeds (this provision is effective as if enacted in the CARES Act).