The Employee Retention Credit (ERC) was introduced as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act to incentivize employers who keep workers on payroll during the pandemic by offering a refundable tax credit against employment taxes.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, also known as the Consolidated Appropriations Act, 2021 (CAA), expanded and extended the ERC to include employers who were previously ineligible to claim the ERC because they received Paycheck Protection Program (PPP) loans from the SBA. If you are a PPP loan recipient, you may now be eligible for this tax credit with this change.

Changes to the Employee Retention Credit Offers New Opportunities for Employers

The ERC originally had a rate of 50% on qualified wages, and with the new changes, that ERC rate was increased to 70% for the first two quarters of 2021. The changes also increased the limit on per employee creditable wages from $10,000 for the year for 2020 to $10,000 for each eligible quarter for 2021.

In the original guidance, it was required for employers’ gross receipts to have experienced a 50% YoY decline, and now that has been adjusted to 20%, making more employers eligible. Companies, tax-exempt organizations, colleges and universities, and entities providing medical or hospital care are now entitled to ERC benefits in 2021 if they experience a decline of more than 20% in gross receipts as compared to their gross receipts for the same calendar quarter in 2019. The new guidance also increased the number of full-time equivalent employees counted from 100 to 500 when determining the relevant qualified wage base.

Employee Retention Credit for Quarters Beginning after December 31, 2020

“As a result of the new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.”1

Use these steps to determine if your company is eligible for the ERC under the new guidelines.

  • Step 1: Did the business have an Eligible Quarter?
    • The business was fully or partially suspended by the government.
    • The business had a 20% reduction in gross receipts as compared to same quarter in 2019. If same quarter 2019 didn’t exist, use 2020.
  • Step 2: What is the Number of Full Time Equivalent Employees
    • If the business has fewer than 500 FTEs, all wages paid qualify.
      • Added: Credit can be taken in Advance = to 70% average paid by employer in 2019
    • If the business has more than 500 FTEs, only wages paid for not providing service qualify (wages paid not to work).
  • Step 3: Determine Qualified Wages (Max $10,000 qualified wages per employee per Quarter = $7,000 credit per employee per quarter)
    • Make election to treat wages plus healthcare costs as first coming out of new PPP.
    • Excess wages & healthcare costs qualify for ERC cap at $10,000 per employee of wages x 70% (determined by quarter).

Added: The rule preventing inflating wages in an eligible quarter was scratched. Employer can pay bonuses to employees to reach cap for quarter.

Employee Retention Credit for the Period March 12, 2020 through December 31, 2020

“Prior to the Relief Act amendments, section 2301(j) of the CARES Act provided that an eligible employer that received a covered loan under paragraph (36) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)), as added by section 1102 of the CARES Act (a Paycheck Protection Program loan or PPP loan) would not be eligible for the employee retention credit. Section 206 of the Relief Act amended section 2301 of the CARES Act to permit an employer that received a PPP loan to be eligible to claim an employee retention credit under section 2301 of the CARES Act by striking section 2301(j) of the CARES Act, effective retroactive to the original effective date of the CARES Act.”2

To see if your business can claim a refund of up to $5,000 per employee, follow these steps.

  • Step 1: Did business have an Eligible Quarter?
    • The business was fully or partially suspended by the government.
    • 50% reduction in gross receipts as compared to same quarter in 2019; continue to qualify until receipts back to 80% of same quarter 2019.
  • Step 2: Number of Full Time Equivalent Employees
    • If less than 100 FTEs, all wages paid qualify.
    • If more than 100 FTEs, only wages paid for not providing service qualify (wages paid not to work).
  • Step 3: Determine Qualified Wages (Max $10,000 qualified wages per employee = $5,000 credit per employee)
    • Make election to treat Wages plus Healthcare Costs as first coming out of PPP.
    • Excess wages & healthcare costs qualify for ERC cap at $10,000 per employee of wages x 50% (determined by quarter).

 

If you received a PPP loan or your gross receipts experienced 20% or greater YoY loss, you may now have additional tax credits available to you. Please contact us to evaluate your situation.

1 New law extends COVID tax credit for employers who keep workers on payroll, IR-2021-21, January 26, 2021, https://www.irs.gov/newsroom/new-law-extends-covid-tax-credit-for-employers-who-keep-workers-on-payroll

2 Guidance on the Employee Retention Credit under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act, Notice 2021-20, Page 9, https://www.irs.gov/pub/irs-drop/n-21-20.pdf