We have previously written about some of the far-reaching implications of the latest colossal federal spending package, the Consolidated Appropriations Act, 2021 (“CAA”). This post will provide an overview of changes made to the employer tax credits for employee retention, first established by the CARES Act, which was signed into law in March. The changes should be a boon to businesses and non-profits negatively affected by the pandemic who have kept paying employees through their difficulties or who intend to keep doing so through the next few potentially rough months.
CARES Act Credit
Way back in March, the CARES Act provided for a fully refundable payroll tax credit for eligible employers that kept paying employees in 2020 despite pandemic-related struggles. The credit allowed employers to take a credit of up to 50% of each of its employees first $10,000 of qualified gross wages. Wages were eligible if they were earned by the employee during a quarter in which the employer either faced a decrease in gross receipts of 50% versus the same quarter in 2019 or was forced by government directive to wholly or partially shut down. Employers with over 100 employees could only use the credit if the employees were not providing services (aka working). Affiliated companies sharing more than 50% common ownership were and are considered one employer for the purposes of the 100 employee rule.
As originally constituted, employers who took money under the Paycheck Protection Program (“PPP”) could not take the tax credit. This will be retroactively modified by CAA to allow those employers to enjoy the benefit of the credit whether or not they took and used PPP money. Although employers cannot claim he credit for wages which they paid with PPP money.
Another change, and one that will affect non-profit employers on their 2020 tax returns, is an expansion of the definition of “gross receipts” to “include all amounts treated as gross receipts under Section 6033 of the Tax Code” used to calculate whether wages qualify for the credit based on a decrease in revenue in a given quarter. Finally, group health plan expenses not reflected in employees’ gross income can now be treated as wages for the purposes of calculating the credit.
Looking forward into the new year, the credit will now apply to qualified gross wages paid during the first two quarters of 2021 (ends June 30). The amount of credit allowed will now be up to 70% of the first $10,000 qualified wages, meaning up to $7,000 per employee, per quarter. That makes the maximum credit allowable in 2021 $14,000, up from the $5,000 max in 2020. Restrictions on pay rate increases have also been relaxed to allow for hazard pay and a few other defined increases.
In addition to being more generous, the eligibility criteria for the credit has been relaxed. Firstly, now employers with between 101 and 500 employees can now take the credit regardless of whether the subject employees are providing services or not. Secondly, whereas employers not subject to a shutdown in 2020 had to show a 50% decline in gross receipts on a quarter over quarter basis to qualify for the credit, in 2021 they will only have to demonstrate a 20% decline. This is still calculated versus 2019 levels except for employers not yet in existence in 2019, who compare to 2020 revenues. Qualified employers will also now include state run higher education and medical institutions, and federally chartered institutions such as federal credit unions. Finally, CAA will also allow employers with fewer than 501 employees to take advance payments prior to the payroll taxes actually being paid, with claw backs in the event of overpayment.
If you have questions concerning the Consolidated Appropriations Act, 2021 the attorneys at the Wladis Law Firm may be reached at (315) 445-1700 or by emailing your usual firm contacts. We will do our best to provide you with updates and will be available to answer questions as circumstances change.
 Weighing in at $2.3 trillion and 5,593 pages, it is possibly the most expensive and the longest legislation in U.S. history.
Christopher J. Baiamonte
Mr. Baiamonte concentrates his practice primarily on civil litigation. He counsels individual, corporate, and municipal clients on resolving disputes ranging from environmental liability to shareholders rights to creditor–debtor suits. He also works with clients to navigate various state and federal regulations relating to areas such as environmental protection, employment, and civil rights.