Is Your Business Maximizing Its Payroll Tax Credits Under the Consolidated Appropriations Act?

Updated 2/3/2021 at 11:30 am ET

On December 27, 2020, the President signed into law the Consolidated Appropriations Act (“CAA”). The CAA expands, enhances and modifies some of the payroll tax provisions established under The Coronavirus Aid, Relief and Economic Security (“CARES”) Act, The Family First Act and modifies the employee deferral repayment established by the President in August. It also establishes a 2020 disaster relief employee retention credit. The most notable changes are the enhancements and modifications to the Employee Retention Credit.

Employee Retention Credit under the CARES ACT

To understand the changes to the ERC, lets first summarize the credit as it was established under the CARES Act.

Under the CARES Act, eligible employers are allowed a credit against payroll taxes for 50% of the qualified wages of an eligible employee for wages paid from March 13, 2020 to December 31, 2020. The maximum credit is $5,000 per employee. The credit is refundable if it exceeds the employer’s social security or railroad retirement tax due in a quarter.

To be considered an eligible employer, employers must meet one of two criteria:

1.  The employer’s operations must be fully or partially suspended during the calendar quarter as a result of orders from an appropriate government authority due to COVID 19.
2. The employer’s gross receipts for the quarter are 50% less than the gross receipts for the same quarter in the prior year.

An employer has a significant decline in gross receipts in the second calendar quarter in 2020 when the employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. An employer continues to qualify under this criterion until the first quarter after its gross receipts are greater than 80% of the same calendar quarter in 2019 or with the first quarter in 2021.

Qualified wages for the ERC depend on size of the employer. A small employer, defined as an employer with 100 or less full-time employees during 2019, includes any employee paid wages during the fully or suspended period under criteria (1) or during the applicable quarter for employers qualifying under criteria (2). Qualified wages include wages and employer health plan costs up to a $10,000 limit per employee. Each employee’s wages included are limited to the wages that were paid to the employee during an equivalent period during the 30 days immediately preceding the current period.

For employers considered large employers, with more than 100 employees in 2019, the wages qualifying for the credit only include wages for employees not providing services due to the criteria (1) COVID-19 closure or criteria (2) gross revenue reduction described above. A controlled group of corporations is considered a single employer for this purpose.

Qualified wages do not include any wages that the employer received a credit for as qualified sick or family leave wages (section 7001 and 7003 of the FFCRA) or paid family leave wages under paid Internal Revenue Code §45S of the Internal Revenue Code. Wages cannot be included for an employee who is included in the Work Opportunity Tax Credit. The credit reduces the employer’s payroll deductions, though receipt of the credit itself is not taxable income.

Additional details regarding the Employee Retention Credit under the CARES Act are detailed in our blog, Employee Retention Credit – A Second Look.

CAA Changes to the Employee Retention Credit for 2020

The CAA removes the provision that disqualifies businesses and non-profit organizations that obtained a Paycheck Protection Plan (“PPP”) loan from being an eligible employer. To the extent that these employers qualify as an eligible employer as described above, they may now take the ERC for qualified wages that were not paid with forgiven PPP loan proceeds.

CAA Changes to the Employee Retention Credit for 2021

The CAA extends the ERC for qualified wages paid through June 30, 2021. It also enhances the credit in two key ways:

• The credit increases from 50% of qualifying wages to 70% of qualifying wages.
• Qualifying wages increase from $10,000 in total for all calendar quarters to $10,000 per quarter resulting in a maximum credit per eligible employee of $14,000 in 2021 compared to $5,000 in 2020.

In 2021, an eligible employer is an employer whose operations were (1) fully or partially suspended during the calendar quarter as the result of an order from an appropriate government authority due to COVID 19 or (2) whose gross receipts for the quarter are 20% less than the gross receipts for the same quarter in 2019 or for the prior quarter. An employer could compare its first quarter 2021 receipts to the first quarter receipts in 2019 or to the fourth quarter receipts of 2020 to determine whether there has been a 20% reduction in gross receipts.

The definition of a small employer is increased from 100 employees to 500 employees based on 2019 employee headcount. For qualifying employers with 500 or less employees, qualified wages include wages paid to employees not to work, as well as wages paid to employees who are working.

Wages for 2021 are not limited to the wages that were paid for an equivalent amount of work for the 30 days prior to the period of the credit. Wages can now include pandemic pay amounts or other pay increases subject to the $10,000 limit per quarter.

Small employers, now defined as employers with 500 of less employees, are eligible to receive an advance payment of the credit up to 70% of the average wages for the same quarter in 2019. If the advance payment exceeds the quarterly amount of the ERC, the employer’s payroll tax is increased by the excess.

Qualified employers for 2021 now include public colleges and universities and public entities with the principal purpose of providing medical or hospital care.

Consistent with the CARES ACT provisions, qualified wages do not include wages that the employer received a credit for as qualified sick or family leave wages (section 7001 and 7003 of the FFCRA) or paid family leave wages under paid Internal Revenue Code §45S of the Internal Revenue Code. Wages cannot be included for an employee who is included in the Work Opportunity Tax Credit. The same wages may not be used for the employee retention credit and for PPP loan forgiveness.

Changes for the Family First Act Payroll Tax Credits

The Family First Act, modified by the CARES Act mandated that employers with fewer than 500 employers provide paid leave to an employee who was unable to work or telework during April 1, 2020 to December 31, 2020 because the employee:

1. Is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
2. Has been advised by a health care provider to self-quarantine related to COVID-19;
3. Is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
4. Is caring for an individual subject to an order described in (1) or self-quarantine as described in (2);
5. Is caring for his or her child whose school or place of care is closed (or child-care provider is unavailable) due to COVID-19 reasons; or
6. Is experiencing any other substantially similar condition specified by the U.S. Department of Health and Human Services.

The paid leave required amounts were based on employee’s wages (100% of regular wages for (1), (2), and (3) above and 2/3 of regular wages for (4), (5), and (6) above) and were not required to exceed:

• $511 per day and $5,110 in total for (1), (2) and (3) above
• $2oo per day and $2,000 in total for (4) and (6) above
• $200 per day and $10,000 in total for (5) above

Employers were allowed a refundable payroll tax credit for 100% of the qualified sick leave amounts paid each calendar quarter from April 1, 2020 through December 31, 2020 up to the thresholds noted above.

The CAA does not extend the mandate requiring employers to provide paid Family First Act paid leave. It does, however, allow employers who elect to pay such leave to obtain a refundable tax credit for employer-provided paid sick and paid family leave through March 31, 2021. The credit amounts per employee are subject to the Family First total limits using April 1, 2020 to March, 31, 2021 as the applicable period. An employer would not be eligible for a credit for any employee under (1) above in excess of $5,110 for the period April 1, 2020 to March, 31, 2021.

Presidential Memorandum

On August 8, 2020, a presidential memorandum was issued allowing electing employers to allow employees to defer the withholding and payment of the employee’s share of social security or the equivalent railroad retirement tax on applicable wages paid during the period beginning September 1, 2020 and ending on December 31, 2020. Applicable wages are wages less than $4,000 on a bi-weekly pay period determined on a pay period by pay period basis.

Under the original terms of the memorandum as supplemented by IRS guidance, employers were required to withhold from the employee the deferred taxes ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. The CAA extends the repayment period to December 31, 2021.

Employers remain liable for any deferred employee employment taxes not withheld and remitted by December 31, 2021.

Employee Retention Credit for Employers Affected by Qualified Disasters

As part of the Disaster Relief Act section of the CAA, a 2020 qualified disaster employee retention business income tax credit is established for employers in a qualified disaster zone whose businesses were inoperable at any time from the date of the disaster through December 27, 2020. A qualified disaster zone is an area declared by the President as disaster area under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during the period beginning January 1, 2020 and ending 60 days after December 27, 2020. It does not include an area designated as a major disaster area only by reason of COVID-19.

Such eligible employers are allowed a credit equal to 40% of the qualifying wages up to $2,400 per eligible employee. An eligible employee is an employee whose principal place of employment prior to the qualified disaster was in the qualified disaster zone.

Qualified wages are wages paid to eligible employees from the date the principal place of employment became inoperable due to the qualified disaster until the earlier of the date the business resumed significant operations at the principal place of employment or 150 days after the last date of the incident period of the qualified disaster. The wages for the eligible employees during this period include wages not to work, wages to work at another location or wages to work at the principal place of employment prior to the date significant operations resumed.

For tax-exempt employers, the credit may be taken against the employer portion of social security taxes.

As with the other payroll tax provisions, qualifying wages do not include wages used for the ERC credit or the Family First Act credit. Wages used for this credit can’t be used for the other credits such as research credit, the work opportunity credit and the empowerment zone credit.  Such wages may not be used as PPP loan forgiveness wages.

Next Steps

Employers should carefully review the provisions above to take advantage of all potential credits. Careful attention should be paid to the ERC to determine potential qualifying wages in light of the new and expanded provisions.

If you have any questions on any of the credits discussed above, please reach out to the SC&H Group Team.