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New Law Clarifies and Expands Employee Retention Tax Credit (“ERTC”), Which Could Impact Q4 2020 Payroll Reports Due January 31, 2020

January 11, 2021

—Time Sensitive—

The latest COVID-19 relief legislation, Economic Aid Act, or “EAA,” includes significant enhancements to the ERTC for small businesses.  The ERTC is a refundable payroll tax credit available to employers whose operations were impacted by a COVID-19 governmental order or that experienced a significant reduction in gross receipts.  The bill enhances the 2020 ERTC program and creates a new ERTC program effective through June 30, 2021.  

Employers may use these credits to offset federal payroll tax deposits or get refunds for payroll tax deposits made previously.  Eligible payroll deposits include employee FICA and income tax withholding components. Employers may also request an advance credit on Form 7200.

Action Item

Please contact your payroll company ASAP to see what their process is for taking advantage of these credits if you qualify.  The Q4 2020 reports are due January 31, 2021.  You will also need to know what the process is for the 2021 reports.

2021 ERTC Highlights

  • Employers can receive a PPP loan and claim the ERTC.  Previously, if you received a PPP loan you were not eligible for this credit.
  • No double benefit – You cannot use the same payroll wages for the PPP loan forgiveness and the ERTC. 
  • Employers can now include allocable healthcare costs.
  • The credit can be claimed retroactively.  If you meet the qualification tests described below and you received a PPP loan in 2020, you can now go back and claim the ERTC for 2020 on your Q4 Form 941. 
    • Employers that paid qualified wages in Q1 through Q3 2020 may elect to treat the qualified wages as being paid in Q4 2020.
    • The deadline to file for 2020 ERTCs is January 31, 2021 (the original filing deadline for Q4 2020 Form 941). 

2020 ERTC Computation

  • Credit is equal to 50% of qualified wages paid from March 12, 2020 – December 31, 2020. 
  • Credit is capped at $5,000 per employee (i.e., $10,000 of qualified wages) for the year. 

2021 ERTC Computation

  • Credit amount is increased to 70% of qualified wages, which is amended to include the cost to continue providing health benefits. 
  • Credit cap is increased to $7,000 per employee for each of the first two quarters of 2021 ($10,000 of qualified wages * 70%), for a total credit of $14K. 

Qualification

  • The operation of the employer’s business must have been fully or partially suspended during at least one quarter in 2020 by government order, OR 
  • The business experienced a precipitous drop in gross receipts:
    • 2020 – at least a 50% drop in gross receipts for quarters in 2020 relative to the same quarters in 2019.
    • 2021 – at least a 20% drop in gross receipts for quarters in 2021 relative to the same quarters in 2019.
      • Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.
      • A safe harbor is provided where employers may elect to use the prior quarter’s gross receipts to qualify (e.g., to test Q1 2021 eligibility, an employer can elect to compare Q4 2020 to Q4 2019).
  • Employee limit:
    • 2020 – no more than 100.
    • 2021 – no more than 500.

Conclusion

While this legislation is welcome for small business owners, the last minute nature of this legislation will create challenges for payroll companies and businesses to take advantage of it for 2020.  The key is to contact your payroll tax preparer now to determine their process for taking the credit and determine your eligibility.  Please let us know if there is supporting information we can help you with as well. As always, we will continue to help and support you during this difficult time.  

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