IRS Clarifies COVID-19 Employee Retention Credits for PPP Recipients

In a notice issued on March 1, 2021, the IRS announced new guidance for employers that claim the employee retention credit and also participate in the Paycheck Protection Program (PPP) provision of the CARES Act in 2020 and 2021. Find out what organizations need to know about these clarifications and changes.

What is the Employee Retention Credit?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a piece of legislation that was passed in March 2020, at the outset of the historic COVID-19 pandemic. The $2 trillion law allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn, including the introduction of the PPP. 

One provision of the CARES Act is the employee retention credit, which was designed to encourage employers to keep employees on their payroll despite the economic downturn from local shutdowns and shelter-in-place orders. 

According to the IRS, the refundable tax credit, which is used against certain employment taxes, is equal to “50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.” This originally applied to qualified wages paid to employees after March 12, 2020, and before Jan. 1, 2021.

What Does the New Employee Retention Guidance Say?

While vaccine news is promising, the pandemic hasn’t ended yet. In December 2020, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act (Relief Act), which extended several key pandemic programs and initiatives—including the employee retention credit. 

As a result, the IRS issued guidance to clarify updates that were made to the credit. The main clarifications included in the new guidelines apply to employer eligibility, what constitutes a full or partial suspension of business operations, what constitutes a significant decline in gross receipts, and more. 

Three of the most significant clarifications include: 

1. Adjusted Restrictions Associated with the PPP: Originally, employers who received PPP loans didn’t qualify to receive the employee retention credit. However, this has been amended. Now, according to an analysis published by law firm Burr & Forman, eligible employers can retroactively claim the credit “but not on amounts included as wages for Paycheck Protection Program loan forgiveness.”
2. Amended Definition of “Eligible Employer”: In 2021, an eligible employer is defined as an organization that either experiences a full or partial suspension of trade or business operations due to COVID-19, or experiences a decrease in gross receipts during a calendar quarter in 2021 less than 80% of gross receipts from the same quarter in 2019. 
3. Extended Application of the Employee Retention Credit: Now, employers can claim the employee retention credit on qualified wages paid after Dec. 31, 2020, through June 30, 2021. 

Read Notice 2021-20 for a comprehensive breakdown of these changes and clarifications.

What Else Should Employers Know About COVID-19 Regulations?

A new stimulus package is currently working its way through the Senate after passing through the House in late February 2021. While not law yet, the bill promises to provide relief to Americans through several key initiatives—many of which may impact small- and mid-sized businesses around the country. 

As the pandemic slowly winds down, Congress and local and state governments may elect to extend existing protections and provisions or phase them out. HR needs to stay on top of these adjustments to ensure that employers remain compliant with all applicable laws.