The American Rescue Plan Act of 2021 was signed by President Biden on March 11, 2021, to address the continuing economic impact of the coronavirus (COVID-19) pandemic. This legislation provides tax relief for employers and employees by further extending and expanding provisions found in the Families First Coronavirus Relief Act (FFCRA), the Coronavirus Aid, Relief and Economic Security (CARES) Act, and the Consolidated Appropriations Act, 2021.
Extension of the Employee Retention Credit (ERC)
As noted in our previous bulletin, the Consolidated Appropriations Act of 2021 (CAA) extended and expanded eligibility for the refundable employee retention tax credit. Expansion of the employee retention credit under the CAA applies to qualified wages paid January 1, 2021, through June 30, 2021.
The American Rescue Plan Act (ARPA) further extends the employee retention credit to cover qualified wages paid July 1, 2021 through December 31, 2021. The ARPA legislation continues the ERC rate of 70%, on up to $10,000 in qualified wages, per employee and per quarter, for qualified wages paid July 1, 2021 through December 31, 2021. Therefore, an eligible employer could claim up to $7,000 of credits, per employee and per quarter, for qualified wages paid in quarter 3 and 4 of 2021. Taking into account the CAA extension and the ARPA extension, an eligible employer could potentially claim up to $40,000 in qualified wages and $28,000 of employee retention tax credits per employee for the entire 2021 calendar year.
Changes to the Employee Retention Credit
The existing COVID-19 employee retention credit – which is allowed against the employer’s portion of the OASDI tax – still applies, as applicable, to wages paid after March 12, 2020, and before July 1, 2021. However, beginning July 1, 2021, the employee retention credit is allowed only against the employer’s portion of the Medicare (HI) tax under Code Sec. 3111(b). As a result of this change, beginning July 1, 2021, employers may no longer hold OASDI taxes in anticipation of receiving the ERC. Employers must deposit the 6.2% OASDI tax for wages paid in quarters 3 and 4. Instead, employers may hold the 1.45% Medicare tax in anticipation of receiving employee retention credits in quarters 3 and 4.
The ARPA adds a “recovery startup business” as an additional category of eligible employers. A recovery startup business is a business established after February 15, 2020, with annual gross receipts of $1 million or less. A recovery startup business is eligible even if it does not otherwise meet the general eligible employer ERC requirements (suspension by government order, reduction in gross receipts). The amount of ERC available to a recovery startup business is limited to $50,000, per employee and per quarter, but only for wages paid after June 30, 2021.
Employers will continue to claim the ERC on their quarterly employment tax returns. To the extent employee retention credits exceed payroll tax liabilities, a refund of the excess credit will be issued upon filing of the quarterly employment tax return (most commonly Form 941). Employers that averaged 500 or fewer employees in 2019 can elect an advance payment of the credit by filing Form 7200 (Advance Payment of Employer Credits Due to COVID-19), but this advance is intended for employers with immediate cash flow needs.
Employee Retention Credit: The Basics
As with previous extensions of the ERC, an employer is generally eligible for the credit if:
- an employer’s operations were fully or partially suspended during the calendar quarter due to governmental orders limiting commerce, travel, or group meetings due to COVID-19; or
- an employer’s gross receipts declined by 20% or more, compared to the same quarter in 2019.
For exempt organizations, “gross receipts” continue to be defined under Section 6033, which includes investment income. Specifically, gross receipts are the gross amount received by the organization from all sources without reduction for any costs or expenses. Gross receipts are not limited to dues or other exempt-function income.
An employer subject to a government order, who can maintain “comparable” operations through telework or other means, will not be eligible for the ERC unless they can qualify under the gross receipts test instead. Employers claiming the ERC based on suspended operations may only claim credits for wages paid during the period that a governmental order was in effect. Once governmental orders are lifted, only employers with a 20% decline in gross receipts will continue to be eligible to claim the ERC.
Employers who had 500 or fewer employees on average in 2019 will continue to claim the ERC based on all wages paid to employees during the period of suspended activities or significant decline in gross receipts, regardless of whether the employees performed services or worked during the time for which they were paid. Employers with more than 500 employees on average in 2019 may only claim the ERC for wages paid to an employee for time the employee is not providing services. A loss of productivity does not amount to not providing services.
Qualified wages include an eligible employer’s qualified health plan expenses that are properly allocable to those wages. Additionally, any wages paid to employees under a preexisting vacation, sick and other leave policy during the period of the full or partial suspension of operations, or a significant decline in gross receipts, are considered qualified wages for purposes of the employee retention credit. Required sick leave wages or family leave wages paid under the Families First Coronavirus Response Act are excluded because those wages are taken into account in calculating a separate payroll tax credit.
Employers who receive a Small Business Interruption Loan under the Paycheck Protection Program (“PPP”) are eligible for the employee retention credit. However, only qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness will count toward eligibility for ERC.
Paid Sick and Family Medical Leave
The Consolidated Appropriations Act of 2021 extended payroll tax credits for paid sick leave or family medical leave provided under the FFCRA through March 31, 2021. Now, the American Rescue Plan Act has further extended these tax credits for paid sick leave or family medical leave wages paid beginning on April 1, 2021, and ending on September 30, 2021. Under the ARPA extension, eligible employers can claim a refundable credit against the employer’s portion of Medicare tax for required sick leave or family leave paid to an employee who cannot work due to coronavirus (COVID-19).
In calculating the qualified sick leave credit, the amount of qualified sick leave wages is limited to $511 per day ($5,110 in the aggregate) per employee if the employee cannot work or telework because he or she:
- is subject to a federal, state, or local quarantine or isolation order related to COVID-19;
- has been advised by a health care provider to self-quarantine due to COVID-19-related concerns; or
- is experiencing symptoms of COVID-19 and is seeking a medical diagnosis.
The amount of qualified sick leave wages is further limited to $200 per day ($2,000 in the aggregate) per employee if the employee cannot work or telework because he or she:
- is caring for an individual who is subject to a quarantine or isolation order related to COVID-19 or has been advised to self quarantine due to COVID-19-related concerns;
- is caring for his or her child whose school or place of care has been closed, or whose care provider is unavailable, due to COVID-19 precautions; or
- is experiencing a substantially similar condition specified by the U.S. Department of Health and Human Services (in consultation with the Treasury Department and Labor Department).
For paid family leave tax credit, the amount of qualified family leave wages is limited to $200 per day ($10,000 in the aggregate) per employee if the employee cannot work or telework because he or she must care for a son or daughter under age 18 whose school or place of care has been closed, or whose care provider is unavailable, due to a declared COVID-19 public health emergency.
Employers affected by COVID-19 may benefit from extended payroll tax credits provided under the American Rescue Plan Act of 2021. Employers should evaluate their eligibility carefully and continue to monitor future guidance issued by the IRS.
If you need further information, please contact us.
Justin W. Herring, CPA, MST | Tax Manager