The Employee Retention and Employee Retention and Rehiring Tax Credits

The Employee Retention and Employee Retention and Rehiring Tax Credits

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January 7, 2021
The Employee Retention and Employee Retention and Rehiring
Tax Credits
The March 2020 Coronavirus Aid, Relief, and Economic
The structure as a payroll tax credit allows businesses to
Security (CARES) Act (P.L. 116-136) included an
receive the benefit more quickly than typically would be the
employee retention tax credit designed to help businesses
case for an income tax credit. The credit is refundable,
retain employees during the Coronavirus Disease 2019
meaning it can be received if credit amounts exceed payroll
(COVID-19) public health emergency. The credit was
tax liability. Additionally, advance payment of the credit is
modified and expanded in December 2020, becoming the
allowed.
employee retention and rehiring tax credit, in the COVID-
related Tax Relief Act of 2020 (enacted as Subtitle B to
When the ERTC was enacted in the CARES Act, employers
Title II of Division N of the Consolidated Appropriations
receiving Paycheck Protection Program (PPP) loans could
Act, 2021; P.L. 116-260). Table 1 summarizes the
not also claim the ERTC. The COVID-related Tax Relief
employee retention credits available in 2020 and 2021.
Act of 2020 provided that employers receiving PPP loans
could claim the ERTC with respect to wages not used to
The Employee Retention Tax Credit
support PPP loan forgiveness.
Employee retention credits have historically been deployed
as a policy tool to provide disaster tax relief. The goal has
This credit does not apply to government employers. A
been to reduce the cost to employers of keeping employees
provision provides for transfers to the Old-Age and
on their payrolls during the disaster recovery period. An
Survivors Insurance Trust Fund and the Disability
employee retention tax credit (ERTC) was enacted as a
Insurance Trust Fund, so that the Social Security trust funds
policy response to the COVID-19 pandemic, which has
would not be affected.
caused prolonged labor market disruptions.
ERTC in the COVID-related Tax Relief Act of 2020
ERTC in the CARES Act
The COVID-related Tax Relief Act of 2020 extends the
Under the CARES Act, the ERTC could be taken for wages
employee retention tax credit to apply to wages paid after
paid after March 12, 2020, and before January 1, 2021.
December 31, 2020, and before July 1, 2021. The credit is
Employers could claim a payroll tax credit of up to $5,000
renamed, now the “employee retention and rehiring credit.”
per employee for qualified wages paid while closed or
The credit rate is increased to 70% of qualified wages. The
having reduced operations due to COVID-19. For 2020, the
credit can be computed on up to $10,000 in qualified wages
credit is computed as 50% of up to $10,000 in qualified
paid to an eligible employee per calendar quarter. Thus, the
wages paid to an eligible employee. (Eligible employees are
maximum credit amount for 2021 is $14,000 (70% of up to
generally those who have been employed by the employer
$20,000 in qualified wages paid over the first two quarters).
for at least 30 days.) Health plan expenses can be treated as
qualified wages when computing the credit.
For 2021, the definition of eligible employer is modified so
that employers with gross receipts 20% less than gross
Eligible employers are those who (1) are required to fully or
receipts in the same calendar quarter in 2019 can qualify for
partially suspend operations due to a COVID-19-related
the tax credit. Employers can also use the previous calendar
order (including nonprofit employers); or (2) have gross
quarter (as opposed to the same calendar quarter in the
receipts 50% less than gross receipts in the same quarter in
previous calendar year) to establish eligibility for the credit.
the prior calendar year (with the credit no longer being
available once gross receipts are 80% of prior year calendar
For 2021, qualified wages continue to depend on the
quarter gross receipts).
employer’s number of employees. The threshold below
which employers can claim the credit for all wages paid, as
Qualified wages for the purposes of the credit depend on
opposed to claiming it for wages paid only when services
the number of employees the employer had during 2019. If
are not provided, is increased to 500 full-time employees.
the employer had more than 100 full-time employees,
qualified wages are wages paid when employee services are
Additional changes to the credit create special rules for
not provided. (Qualified wages are limited to the amount
employers not in existence for 2019, potentially allowing
the employee would have been paid for working an
such employers to be credit-eligible. Limits are also placed
equivalent duration during the 30 days preceding the
on advance payments. Certain governmental employers,
nonservice period.) If the employer had 100 or fewer full-
including college and university and medical or hospital
time employees, all employee wages paid by eligible
employers, may also be credit-eligible in 2021.
employers are credit-eligible. Wages taken into account for
this credit cannot be taken into account for the tax credit for

employer-provided paid family and medical leave.
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link to page 2 The Employee Retention and Employee Retention and Rehiring Tax Credits
Table 1. Key Features of the Employee Retention and Employee Retention and Rehiring Tax Credits
Credit Feature
ERTC in the CARES Act
ERTC in the COVID-related Tax Relief Act
Effective Dates
March 13, 2020-December 31, 2020
January 1, 2021-June 30, 2021
Credit Rate
50%
70%
Maximum Credit
$5,000 in 2020
$14,000 in 2021
Amount
(50% of $10,000 in qualifying wages)
(70% of $20,000 in qualifying wages)
Eligibility
Employers who (1) are required to ful y or partial y
Employers who (1) are required to ful y or partial y
suspend operations due to a COVID-19-related order
suspend operations due to a COVID-19-related order
(including nonprofit employers); or (2) have gross
(including nonprofit employers); or (2) have gross
receipts 50% less than gross receipts in the same
receipts 20% less than gross receipts in the same
quarter in the prior calendar year (with the credit no
quarter in the prior calendar year or prior calendar
longer being available once gross receipts are 80% of
quarter. Eligible employers include tax-exempt
prior year calendar quarter gross receipts). Eligible
organizations.
employers include tax-exempt organizations.
Employers receiving PPP loans are eligible.
Employers receiving Paycheck Protection Program

(PPP) loans are eligible.a
Qualified Wage
Employers with more than 100 ful -time employees:
Employers with more than 500 ful -time employees:
Base
wages paid when employee services are not provided.
wages paid when employee services are not provided.
Qualified wages limited to the amount an employee
Employers with 500 or fewer ful -time employees:
would have been paid for working an equivalent
wages paid by eligible employers are credit-eligible.
duration during the 30 days preceding the nonservice
period.
Employers with 100 or fewer ful -time employees:
wages paid by eligible employers are credit-eligible.
Public Entities
Government entities general y ineligible.
Col ege and university and medical or hospital
government entities are credit-eligible.
Source: CRS analysis of P.L. 116-136 and P.L. 116-260.
Notes:
a.
Employers receiving PPP loans initial y were not eligible to claim the ERTC. Retroactive changes in P.L. 116-260 provide that employers
receiving PPP loans qualify for the ERTC with respect to wages not used to support PPP loan forgiveness.
Economic and Policy Considerations
There are also questions about the credit’s potential for
Structuring the tax credit as a payroll tax credit, as opposed
economic relief. If employers have laid off employees due
to an income tax credit, addresses policy concerns
to lack of consumer demand, employers may be slow to
associated with past employee retention and hiring credits.
hire, even with employment subsidies. Economic theory
Payroll tax credits can be delivered relatively quickly,
tends to indicate that demand-side stimulus, rather than
addressing concerns about timing associated with past
supply-side (like employer tax relief), is the most effective
ERTCs. The benefits of payroll tax credits extend to all
tool for boosting employment during periods of economic
employers and are not limited to taxpayers with income tax
weakness.
liability. Further, payroll tax credits can be claimed by
nonprofit employers.
Reductions in Federal Revenues
The Joint Committee on Taxation (JCT) estimated that the
Evidence suggests that take-up of the 2020 ERTC was
ERTC, as enacted in the CARES Act, would reduce federal
lower than some had anticipated. One factor possibly
revenue by $54.6 billion (the combined total for FY2020
contributing to low take-up was that employers receiving a
and FY2021). Data on actual credit claims for 2020 are not
PPP loan were generally ineligible for the ERTC.
available.
Removing this restriction, alongside other changes such as
relaxing the reduction in receipts threshold and increasing
The retroactive modifications to the ERTC enacted in P.L.
the credit amount, could lead employers who had not
116-260 are estimated to reduce federal revenue by an
previously claimed the ERTC to claim the credit in 2021.
additional $5.2 billion in FY2021. Modifying the credit and
extending it through the first half of 2021 is estimated to
One metric for evaluating the effectiveness of ERTCs
reduce federal revenues by $15.5 billion (the combined
relates to the economic efficiency, or “bang for the buck,” of
total for FY2021 and FY2022).
these incentives. To the extent that this credit is claimed for
employees that would have been retained absent this credit,
Molly F. Sherlock, Specialist in Public Finance
it is less economically efficient than payments directly
targeted at those who are laid off.
IF11721
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The Employee Retention and Employee Retention and Rehiring Tax Credits

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