The Coronavirus Aid, Relief, and Economic Security (CARES) Act went into effect on March 13, 2020, after approval by both houses of Congress and the signature of President Donald Trump. The CARES Act included an employee retention credit as a means of encouraging employers to keep employees on the payroll in wake of the COVID-19 pandemic.
The employee retention credit portion of the CARES Act originally ran from March 13 to December 31, 2020. With this provision, employers could claim a tax credit on employment taxes up to 50 percent of every $10,000 of an employee’s wages. The first version of the CARES Act also included a portion of the employer’s cost of healthcare benefits.
Employee Retention Credit Undergoes Changes for 2021
Shortly before Trump left office in January 2021, he signed legislation allowing for an extension of the employee retention credit and additional benefits. Under the second version, employers may claim a credit on employment taxes up to 70 percent of every $10,000 of an employee’s wages until June 30, 2021. President Joe Biden has indicated that he is open to signing legislation to extend the employee retention credit a third time depending on how the economy is performing after July 1.
Additional Changes to the Employee Retention Credit for 2021
The Consolidated Appropriations Act (CAA) incorporated the following changes to this year’s employee retention credit:
- To qualify as an employer, your gross receipts must be 80 percent less than the same time frame in 2019. This is an increase from 50 percent for the version of the credit that expired on December 31, 2020.
- Companies not yet operating in 2019 can compare gross receipts from 2021 to the same quarter in 2020 for eligibility purposes.
- You do not have to use the first two quarters of 2021 to determine eligibility if it would be more advantageous to use the last quarter of 2020 and the first quarter of 2021.
- The definition of large employer changes from 100 to 500 employees. The advantage of this is that it allows employers to use a more liberal interpretation of qualified wages if they meet the threshold for employees. You may count wages for both active and inactive employees.
- The 2021 credit adds colleges, universities, healthcare organizations, and some organizations chartered by Congress.
- If your company has less than 500 employees, you can advance the employee retention credit payments to the quarter that you paid to those employees. This provision of the employee retention credit extends to businesses not yet open in 2019, part-time employees, and seasonal workers.
- The CAA revokes the limit on qualifying wages and adjusts it to the amount the employee would have received 30 days prior to the qualifying period. Qualifying wages cannot be more than this amount. This provision benefits employers who pay bonuses to essential workers.
Employer Qualifications for 2021
Employer eligibility changed between the versions of the employee retention credit expiring on December 31, 2020, and June 30, 2021. For the first half of this year, a government entity must have ordered your business to fully or partially close due to COVID-19. Political subdivisions, state governments, and the federal government do not qualify for the credit nor do the self-employed for their own wages. However, you can claim the employee retention credit if you’re self-employed and employ other people.
We understand this is a lot for any business owner to process, so our team advises you to contact your CPA for further clarification. Palmetto Payroll is happy to help with your payroll needs, tax filing and so much more! Contact us for a consultation and to see all the ways we can help a business run more smoothly.