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The Employee Retention Credit Changes in 2021

The Coronavirus Aid Relief and Economic Security Act (CARES) was introduced in March of 2020 as a direct response to the ongoing pandemic. Originally the CARES Act was set to expire on December 31, 2020, but on December 27th, 2020 the Consolidated Appropriations Act of 2021 was signed into law. This extended and amended many of the original components of the CARES Act.

These extensions and amendments have been applied to the Employee Retention Credit- a payroll tax credit designed to encourage employers to keep employees on the payroll. Going forward, the employee retention credit for 2021 has some differences from the original 2020 provisions. Additionally, the 2020 credit has received some retroactive changes.

Employee Retention Credit 2020 

Employers can receive a credit against employer-paid social security tax equal to 50% of the qualifying wages. Qualifying wages for each employee are limited to $10,000 for the 2020 year. This applies to any wages paid from March 13, 2020, through December 31, 2020. 

For eligibility, an employer must meet one of the following criteria:

  • They are fully or partially suspended under order from a governmental authority limiting commerce, travel, or group meetings due to COVID-19.
  • They experienced a 50 percent decline in gross receipts in any calendar quarter. This means that gross receipts are less than 50 percent compared to gross receipts from the same calendar quarter in the prior year.

The 2020 credit is available to employers with less than 100 employees OR employers with more than 100 employees IF wages are paid during non-working periods triggered by a government shutdown.

Employee Retention Credit 2021

Employers can receive a credit against employer-paid social security tax equal to 70% of the qualifying wages. Qualifying wages for each employee are limited to $10,000 for each calendar quarter in 2021. This applies to any wages paid from January 1, 2021, through June 30, 2021. 

For eligibility, an employer must meet one of the following criteria:

  • They are fully or partially suspended under orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19.
  • They are experiencing a 20 percent decline in gross receipts in any calendar quarter. This means that gross receipts are less than 80 percent compared to gross receipts from the same calendar quarter in the prior year.

The 2021 credit is now available to employers with up to 500 employees.

The employer claims the credit against the applicable payroll taxes paid on future payrolls. If the credit exceeds the applicable payroll taxes, then the excess will be refunded to the employer. Additionally, health care costs are now considered qualified wages- even if no other compensation is paid to the employee. This applies retroactively to 2020.

The credit is now available if the employer is a borrower under the Payroll Protection Loan Program. This applies retroactively to 2020 as well. However, the credit is not available to fund wages that were paid with the proceeds of the Payroll Protection Loan Program if those proceeds have been or will be forgiven. Additionally, the amount of the credit is reduced by any credits allowed under Section 7001 or 7003 of the Families First Coronavirus Relief Act (i.e., the sick leave and family leave credits). 

The changes are subtle but important to note going forward and when looking back at 2020 records.

Is there anything Payroll Systems can help you with as you accommodate rapid legislation changes? Reach out and talk to us about the easy-to-scale solutions you need for your business.

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.