How to account for the employee retention credit
Published August 1, 2021
Private companies and not-for-profits are wrestling with accounting for the employee retention credit that qualifies eligible employers for payroll tax reduction under COVID-19 relief laws. The Private Company Council (PCC) recently offered some guidance.
Evolution of the credit
The CARES Act, which was enacted in March 2020, introduced the employee retention credit for employers that kept workers on their payrolls. It was designed to help curb layoffs during the COVID-19 pandemic.
Under the CARES Act, the tax credit amount equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter. It was subject to an overall wage cap of $10,000 per eligible employee per year. Originally, the credit only covered wages paid between March 13, 2020, and December 31, 2020.
In December 2020, the Consolidated Appropriations Act (CAA) extended and greatly enhanced the employee retention credit. Specifically, the CAA extended the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021.
In addition, for the first two quarters of 2021 ending on June 30, the CAA:
- Increased the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter, and
- Increased the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter.
For the first two quarters of 2021 ending on June 30, the CAA included a liberalized employer eligibility rule based on a required more-than-20% decline in gross receipts, compared to the corresponding 2019 quarter (versus a required more-than-50% decline under the original CARES Act rules).
For the first two quarters of 2021 ending on June 30, the CAA also stipulated that for employers with 500 or more employees (versus 100 or more under the original rules), the employee retention credit can only be claimed for qualified wages paid to employees who are unable to work due to a suspension of the employer’s business or a lack of business. This change has allowed more medium-sized employers to claim the credit in 2021.
In a retroactive change, the CAA stipulated that the employee retention credit can be claimed for qualified wages paid with proceeds from Paycheck Protection Program (PPP) loans that aren’t forgiven. This retroactive change goes back to the day the CARES Act was signed.
The American Rescue Plan Act (ARPA), enacted on March 11, 2021, extends:
- The employee retention credit from June 30, 2021, until December 31, 2021, and
- The rate of the credit at 70% for this time period.
Qualified wages are generally limited to $10,000 per employee per calendar quarter in 2021. So, the maximum credit amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021.
The 2021 amendments to the CARES Act allowed the application of the employee retention credit to go back to 2020 for certain employees. However, recent PCC discussions indicate that many private companies are unsure when and how to record the credits.
The topic also surfaced during a FASB webinar mid-June on private company and not-for-profit accounting matters. Specifically, the webinar received the following questions:
- What accounting models would apply in respect to the employee retention credit?
- Should those credits be presented gross as income or net of the related expenses?
There are no specific rules under U.S. Generally Accepted Accounting Principles (GAAP) that apply to reporting the employee retention credit. However, based on recent PCC discussions, private entities can apply the following three models by analogy:
- The government assistance model in International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance,
- The conditional grant or contribution model in Accounting Standards Codification (ASC) Subtopic 958-605, Not-for-Profit Entities-Revenue Recognition, and
- The gain contingency model in the ASC Subtopic 450-30, Gain Contingencies.
These three models are consistent with three of the four models that could apply to accounting for PPP loans.
The answer to the question about whether the credit should be presented gross as income or net of the related expenses hinges on what accounting model a company has applied by analogy. If a company applies IAS 20, those rules allow an option to present the employee retention credit as either income or net of the qualifying expenses. Under the other two models, the credit would likely be presented gross as income.
For more information
The employee retention credit provides employers that struggle during pandemic-related lockdowns and slowdowns with a valuable tax break. But claiming the credit may lead to confusion when private companies and not-for-profits prepare their financial statements. Contact your CPA to help you apply the accounting model that makes sense based on your organization’s situation.