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More private companies can access additional cash flow while funding payroll and benefits with expanded employee retention credit

15 January, 2021

If your business has been affected by a governmental mandate related to COVID-19, experienced a decline in sales or received a paycheck protection program (PPP) loan, the latest changes to the employee retention credit (ERC) may provide benefits now.  

The ERC has been extended and enhanced for expenses from January 1, 2021 through June 30, 2021, providing more companies with the ability to take advantage of the credit and give greater access to additional cash flow. The credit is particularly beneficial to small employers—defined as companies with 500 or fewer employees (increased from 100 employees in 2020)—but it can also benefit companies over that threshold to the extent that employees are retained without the ability to be productive. For employers that fall within the small employer threshold, all wages paid by the employer qualify for the credit.  

In addition, companies that previously didn’t qualify for the credit due to the participation in the PPP loan program may now be eligible with respect to some past expenses in both 2020 and 2021. 

The recent changes make it easier to qualify for the credit and boost the amount of credit available for expenses incurred in 2021. Other significant changes that we believe will benefit many companies, besides the increase in the employee threshold for small employers, include:

  • Gross receipts test: The revenue decline threshold has been reduced to 20% from 50% and new measurements have been provided. What is unchanged from the original guidance, a company must meet either the gross receipts test or show it was impacted by a governmental mandate affecting their business to qualify for the credit.
  • Percentage of qualified wages allowed: The percentage of qualified wages has increased to 70% from 50%.
  • Amount of credit available: Employers may take a credit on eligible wages as high as $10,000 per employee per quarter for Q1 and Q2 of 2021 (up from a cap of $10,000 per employee for the entire year).

Act quickly to take advantage of additional cash flow opportunity 

Access to cash is immediate as recent guidance provides procedures for reducing current payroll tax deposits. The benefits are claimed in the form of a credit against payroll tax withholding obligations and are refundable if in excess of the current obligations of the company. Recent guidance also clarifies that certain expenses that provide an opportunity to enhance your employee experience can be qualifying wages, such as additional time off to existing employees, rehiring people who have been furloughed and offering additional compensation. These benefits could go a long way in helping employers meet the ongoing demands of their businesses and employees—a benefit for all.

Is the benefit more than just cash or a tax credit?

The tax credit can be significant, but we also believe there is a tangential benefit to your employee base in the form of alternatives that may help with employee retention and job satisfaction. 

Focusing now on your qualification for the credit and the appropriate level of supporting documentation you’ll need can enhance your ability to access additional cash for your business. While doing so, a focus on your current and future compensation and personnel management plans, while at the same time planning for post-COVID-19 scenarios, can help you realize cash benefits and improve employee satisfaction by retaining or enhancing benefits in these difficult times. 

For a more in-depth look at the ERC, see our recently published Tax Insight

To find out how we can help you make the most of this opportunity, contact us for a deeper discussion about your particular situation.

Contact us

Shari Forman

PwC Private Tax Leader, PwC US

Jack Abraham

Partner, Transformation, Retirement benefits services practice leader, PwC US

Ryan Ebner

Tax Partner, Private Company Services, PwC US

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