KEY PROVISION

Other Business Provisions Further Encourage Retention of Employees

Tax & Economic Provisions of 2021 Stimulus | January 2021

As with the PPP loan program, many of the business provisions of pandemic relief focus on employee retention. Consistent with that perspective, the Act extended the employee retention tax credit and the deferred payroll tax provisions of CARES. The:

  • Employee retention tax credit that was set to expire on December 31, 2020 has been extended to June 30, 2021.
  • Credit is also increased to 70% of qualified wages from the 50% credit provided under CARES. It is capped at $7,000 per eligible employee ($10,000 wages X 70%) for each of the first two quarters of 2021 for a maximum credit of $14,000 per employee.
  • Credit is not reduced for any amounts received under the CARES Act in 2020.

Several significant modifications to the credit when compared to the CARES Act retention credit should be noted:

  • To be eligible, a business must be fully or partially suspended under a COVID lockdown order or, under CARES, the business must have experienced a reduction in gross receipts for the quarter of at least 50% when compared to the prior year quarter. The new Act requires a reduction of only 20%.
  • Under CARES, any business that received a PPP loan could not also claim the credit. This has been amended under the Act to allow a credit for any wages paid that are not funded by a forgiven PPP loan. The change is retroactive to 2020 wages, so companies should determine if there were excess qualified wages and consider filing amended payroll tax returns to claim the 2020 credit.
  • Under CARES, the credit could only be claimed for businesses with 100 or more employees for wages paid when employees were not providing services. The restriction did not apply to smaller businesses. The Actd raises the threshold to 500 or more employees.

In 2020, the credit did not apply to any pay increases. Under certain circumstances, pay increases will qualify in 2021.

For businesses with less than 500 employees, a mechanism will be put in place to allow for receipt of the credit prior to paying the qualified wages, which was not provided in 2020. Any overpayment of the credit will have to be repaid.

The credit has also been expanded to include certain governmental entities such as hospitals, universities or federal credit unions.

A separate credit for paid sick leave or family leave connected to COVID-19 that was provided under the Families First Coronavirus Response Act for businesses with less than 500 employees has been extended from December 31, 2020 to March 31, 2021.

In August 2020, President Trump issued a Presidential Memorandum providing for the deferral of the withholding, deposit and payment of certain payroll tax obligations. The Treasury Department subsequently issued Notice 2020-65, indicating these provisions would, at the option of the employer, apply to an employee’s 6.2% portion of Social Security (OASDI) taxes on wages paid between September 1 and December 31, 2020 for any employees whose wages were less than the equivalent of $4,000 for a bi-weekly pay period.

Since this was a deferral and not an abatement, the taxes were to be withheld ratably from wages paid from January 1 to April 30, 2021, in addition to normal taxes required on those wages. The Act extended the catch-up period to include pay periods from January 1 until December 31, 2021.