The Consolidated Appropriations Act included several new relief packages for individuals and businesses. As we dissect the current bill, YHB is producing a series of in-depth analysis on the bill to help you take advantage of the bill. In this article, we will explore the expansion of the employee retention credit.
Employee Retention Credit
The biggest change in the bill related to the employee retention credit. This credit is a refundable tax credit against employment taxes. The IRS allows quick access to these funds in order to keep employees on payroll.
Amount of Credit
Originally, the credit was up to 50 percent of the employee’s wages, but the new law increased this amount to 70 percent. In addition, the maximum amount is now up to $10,000 per employee per quarter.
For example, if your company has three employees. During the 3rd quarter of 2020, you pay the following:
Employee 1 – $20,000 (Credit: $10,000)
Employee 2 – $5,000 (Credit: $3,500)
Employee 3 – $14,000 (Credit: $9,800)
Then in the 4th quarter you pay:
Employee 1 – $20,000 (Credit: $10,000)
Employee 2 – $9,000 (Credit: $6,300)
Employee 3 – $19,000 (Credit $10,000)
The business would qualify for a tax credit of $49,600.
Eligibility
In order to qualify to use the credit, the company must have:
- Full or partial suspension of the operation of their trade or business during any calendar quarter due to government orders OR
- A significant decline in gross receipts
To meet the significant decline in gross receipts test, the company looks at the first day of their first quarter in 2020 where the employer’s gross receipts are less than 20 percent of its gross receipts for the same quarter in 2019. (Prior to the new bill this required a 50 percent decrease).
Most companies will fall under the significant decline in gross receipts test. The bill does allow a credit for companies that were not in business in 2019 as well.Under the new bill, companies can qualify for PPP loans and the Employee Retention Credit as long as the funds from the PPP were not used to pay the same payroll that is covered by the Employee Retention Credit. This calculation is similar to the PPP Round 2 qualification formula, so companies should consider both the PPP Round 2 and the Employee Retention Credit at the same time. For more information about PPP Round 2, see our blog post Congress Passes New Stimulus Bill.
Should you have any questions, contact a YHB advisor today!
Additional articles in this series:
- Congress Passes New Stimulus Bill
- Overview of Second Round of PPP Funds
- New Rules Relating to PPP Loan Forgiveness
- Major Changes to Meals Expense Deductions for Tax Years 2021 and 2022
- Employment Credit for Schedule C Businesses
- Additional Payroll Help from the New Stimulus Bill
- Change for Residential Rental Property Depreciation
- 2020 Tax Extenders
