The Consolidated Appropriations Act, Pub. L. 116-260, which was signed into law on December 27, 2020 (the “Act”), amended and modified the Employee Retention Tax Credit (“ERC”) under the CARES Act, which is available to eligible employers against applicable payroll taxes whose operations were fully or partially suspended due to a COVID-19 government-mandated shut-down order, or employers who experienced a significant decline in gross receipts when compared to the prior year (the “eligible causes”). Under the CARES Act, the credit was equal to 50% of qualified wages (not to exceed $10,000 for all quarters) which were paid between March 13, 2020, and before January 1, 2021.
If a qualified employer employed on average more than 100 employees, the credit was available only for those employees who were not working as a result of the eligible causes. For purposes of determining eligibility for the credit, the significant decline in gross receipts threshold was met when the gross receipts for a calendar quarter in 2020 were less than 50% of gross receipts for the same calendar quarter in 2019. In addition, under the CARES Act, an otherwise eligible employer that received a Paycheck Protection Program (“PPP”) loan was prohibited from claiming the ERC on any wages. For more detailed information about the ERC requirements, prior to modification under the Act, please click here.
The Act expanded and significantly modified the ERC. Pursuant to the Act, the ERC is now equal to 70% of qualified wages paid on or after January 1, 2021, through June 30, 2021. The limit on qualified wages has been significantly increased from $10,000 per employee for all quarters to $10,000 per employee for each quarter. Thus, the maximum credit available to employers is now equal to $7,000 per employee per quarter.
In addition, the Act modified the rules related to the determination of qualified wages based on the size of the employer. Now, for employers with 500 or fewer full-time employees, qualified wages include all wages paid to employees during the applicable period. Employers with 500 or fewer full-time employees will also be allowed to apply for advance payments of ERC. For employers with more than 500 full-time employees, qualified wages include only wages paid during the applicable period to employees who did not work as a result of the eligible causes discussed above. Also, for purposes of determining eligibility for the credit, the significant decline in gross receipts threshold is now met when the gross receipts for the calendar quarter in 2021 are less than 80% of the gross receipts for the same quarter in 2019. In addition, pursuant to the Act, otherwise eligible employers who received PPP loans may now also claim the ERC on qualified wages as long as they were not funded by the PPP loan proceeds.