The Consolidated Appropriations Act of 2021 (CAA) was signed by the President on December 27, 2020 extending benefits enacted by the Families First Coronavirus Response Act (FFCRA).
The CAA brings more than $900 billion to qualified individuals and small businesses. The legislation aims to encourage businesses to keep employees on their payrolls despite pandemic-related challenges.
Though the CAA is an extension of the FFCRA and CARES Act in many ways, there are a few key differences. The most significant is to the Employee Retention Credit (ERC). While the ERC was part of the original incentive, it did not allow businesses who received Paycheck Protection Program (PPP) loans to take advantage of both stimulus provisions. Since PPP loans were so popular, few employers chose to make use of the ERC.
What’s New and How Does It Affect My Business?
In short, the ERC may now be available to PPP loan recipients. It can now be claimed retroactively for 2020, and businesses can claim a 50% credit on wages (up to $10,000) even if they have received forgiveness of a PPP loan. It can be claimed, however, only for wages not covered under a forgiven PPP loan.
How Do I Know if I Qualify?
There are two scenarios in which an employer is eligible for the ERC under the CAA:
- Your business was fully or partially suspended by the appropriate governmental authorities at some point in 2020, or
- Your business had a drop in gross receipts in 2020 of more than 50% from the corresponding quarter of 2019.
If your business only qualifies for scenario 1, you can only take the credit for the time your business was shut down.
If your business qualifies for scenario 2, you can take credits for every quarter that your gross receipts are less than 50%. It will end in the quarter that is 80% of gross receipts from the corresponding quarter of 2019.
What Impact Do FTEs Have on Credit?
If your business qualifies for either of the two scenarios, you must determine the average FTEs (full-time equivalent employees) your business had for 2019. This will determine whether the credit is based on wages paid only to employees not working or all employees paid.
- If the average FTE is over 100, then you can only take the credit on employees paid that were not working.
- If the average FTE is under 100, then you can take the credit on all employees paid, working or not.
Note: The new law allows an employer to take the credit on furloughed employees.
How Will the ERC Change in 2021?
To qualify, an employer needs to see a decline in gross receipts in a calendar quarter of less than 80% of the gross receipts in the same quarter in 2019. (For 2020, gross receipts were required to be less than 50%).
The credit per employee will increase from 50% in 2020 to 70% in 2021 on qualified wages. Qualified wages are wages and compensation paid by an eligible employer to employees including health plan expenses (dental and vision).
Qualified wages for 2020 are $10,000 per employee for all calendar quarters, with a maximum credit of $5,000 per employee for the year.
Qualified wages for 2021 are $10,000 per employee per quarter, with a maximum credit of $7,000 per employee per quarter, for a total of $14,000 per year.
How Can Balance Point Help?
If you are a Balance Point client and wish to take advantage of the ERC, we can help. With Balance Point’s ERC Assistance Service, our trained team members can provide the tools to help you determine eligibility and qualified wages, and assist you with payroll tax filing.