American Rescue Plan Act of 2021: Changes to Employer Payroll Tax Credits
by Jill Clark, CPA
President Biden signed the American Rescue Plan Act of 2021 into law on March 11, 2021. This is the fourth major piece of legislation that has been enacted over the past year all aimed at providing assistance to help combat the economic impacts of the COVID pandemic. While this legislation introduces several new provisions, it also makes changes to several provisions that were first introduced in one of the previous three pieces of legislation.
This article focuses on the changes that were made to the Employee Retention Credit as well as the Paid Sick and Family Leave Credits, created and extended under previous COVID relief legislation.
Changes to the Employee Retention Credit
The employee retention credit (ERC) was first created and made available to eligible employers for certain wages they incurred or paid during 2020 under the CARES Act. The Consolidated Appropriations Act of 2021 (CAA), passed in December of 2020, extended the credit period through the first two quarters of 2021 (through June 30, 2021). The CAA also expanded the credit percentage, increased the maximum credit allowed to be claimed, relaxed some of the thresholds for eligibility and removed the provision in the CARES Act that excluded employers who had taken out a PPP loan from being eligible for the ERC.
The American Rescue Plan Act of 2021, further extends the period for which employers may be eligible to claim these credits through December 31, 2021, making employers eligible for the credit for the entire 2021 calendar year. The more taxpayer friendly rules put into effect by the CAA for the first two quarters of 2021 will continue to apply to the extended credit period enacted under this legislation. In addition, this legislation makes the following changes to the ERC effective July 1, 2021:
- The statute of limitations on employee retention credits that an employer claims under these extended provisions has been increased from 3 years to 5 years.
- The limitations on certain employers with > 500 employees that only allows them to claim the ERC for wages that they pay to their employees who are not providing services have been removed. This legislation removes those limitations only for large employers that meet the definition of a “Severely Financially Distressed Employer”. This is defined as an employer that has had a > 90% decrease in gross receipts during a calendar quarter, determined using the rules that were already in place under the previous ERC legislation.
- A new category was added to the “eligible employer” definition allowing employers that meet the definition of a “Recovery Startup Business” to be eligible for the credit regardless of whether they were impacted by a government shutdown or had a > 20% gross receipts reduction. A “Recovery Startup Business” is defined as an employer that:
a) started their business after February 15, 2020,
b) has average annual gross receipts (determined based on the previous three tax years) of not more than $1,000,000, and
c) does not meet the “eligible employer” definition under the other two eligibility alternatives (impacted by a government shutdown or > 20% gross receipts reduction).
Employers that meet this definition and are eligible for the ERC, are subject to a $50,000 cap on the amount of employee retention credits they are eligible to claim in any given calendar quarter. Additional guidance will be needed to determine what wages paid by a “Recovery Startup Business” qualify for the ERC.
Changes to the Paid Sick and Family Leave Credits
These credits were first made available under the Families First Coronavirus Response Act (FFCRA), the first piece of legislation enacted to provide COVID assistance to the American people. The credits were originally set to expire on December 31, 2020; however, they were extended by the CAA to March 31, 2021.
The general premise of these credits is that certain employers were initially required to provide their employees with paid sick leave (up to 80 hours) and paid family leave (up to 10 weeks) for specified reasons associated with COVID. Employers that were required to provide these benefits to their employees are then reimbursed through refundable payroll tax credits the amounts they are required to pay under these provisions. There are limits on the amount of benefits required to be paid as well as limits on the credits that are available to the employers under these provisions.
The following is a summary of the changes made to these provisions under the recently enacted legislation that will be effective as of April 1, 2021:
• The credit period has been extended to September 30, 2021 for both the sick leave and family leave credits.
• The maximum amount of family leave credit has been increased from $10,000 to $12,000 (paid over 12 weeks), and there is no longer a 10-day waiting period before wages can be paid under the family leave provisions.
• Originally the family leave benefit was only available for employees whose childcare options were impacted due to a school or childcare closure related to COVID. This legislation expands the eligibility for the family leave benefit beyond childcare needs to include the same, much broader, eligibility requirements that exist for the sick leave credit.
• Expands the eligibility for both the family leave and sick leave credits to include leave for the COVID vaccine and any related recovery from such vaccination. For sick leave purposes, if an employee is taking sick leave for this reason their pay must not be less than their regular rate (or minimum wage, if greater), up to $511/day or a total of $5,110 per employee.
• Under the FFCRA, certain employers were initially required to provide these benefits to their employees; however, the CAA 2021 made these provision optional for employers so long as they didn’t discriminate by providing benefits to some but not all of their employees. These benefits remain optional for employers through the expanded credit period.
• Under the FFCRA, employees were only eligible for 10 days (up to 80 hours) of sick leave. This legislation is resetting the 10-day (80 hour) sick leave limit starting April 1, 2021. This will allow employees that have already taken the maximum 10 days (80 hours) of sick leave under the FFCRA to take an additional 10 days (80 hours), if eligible, beyond April 1, 2021 and prior to the expiration of the credit period.
• This Act expands the eligibility of the sick and family leave credits to certain government instrumentalities that are 501(c)(1) organizations.
• The statute of limitations on sick leave and family leave credits that an employer claims under these extended provisions has been increased from 3 years to 5 years.
This legislation also provides similar expanded benefits to self-employed individuals that are eligible to claim these credits under the prior legislation.
Click Here – to read an article that provides a more detailed overview of the eligibility requirements and credit calculation rules, that were in existence prior to the changes made under this Act, for both the Employee Retention Credit and the Paid Sick and Family Leave credits.
If you have any questions regarding the changes that the latest legislation has made to these payroll tax relief provisions, please do not hesitate to reach out to your trusted BRC tax advisor.
Jill W. Clark Director of Tax Quality Assurance, CPA
NC License #30742