Understanding the Expanded Employee Retention Credit
The Consolidated Appropriations Act of 2021 (CAA), signed into law on December 27, 2020, significantly enhanced and extended the Employee Retention Credit (ERC), providing further federal financial relief to businesses impacted by the pandemic.
The ERC is a refundable payroll tax credit for eligible employers equal to 50 percent of qualified employee wages, which includes the employer’s share of health plan costs, encouraging businesses to retain employees and continue paying employee compensation during the pandemic and preventing mass layoffs. It was originally established as part of the Coronavirus Aid, Relief, and Economic Security, also known as the CARES Act. Enacted on March 27, 2020, the CARES Act provides direct economic assistance to American workers, families, businesses, and communities affected by COVID-19.
Under the CARES ACT, an employer who had opted to take out a Paycheck Protection Program (PPP) loan is prohibited to qualify for the ERC. The CAA retroactively removed this mutually exclusive prohibition, allowing an employer to now claim the ERC for qualified wages regardless of the employer’s PPP status and extending the deadline to June 30, 2021.
To qualify for the ERC, an employer must:
- Have carried on a trade or business during the quarter for which it is seeking the credit
- Have experienced any of the following:
- Trade or business suspension, whether full or partial, due to local or federal COVID-related policies restricting commerce, travel, or group meetings
- A 50 percent or more decline in gross receipts in comparison with the same calendar quarter in 2019. Under CAA, this has been expanded such that beginning on January 1, 2021, the employer’s decline in gross receipts must be at least 20 percent less than the corresponding quarter in 2019
From the previous maximum credit of $5,000 per year per employee under the CARES ACT, the CAA expanded the credit to 70 percent of qualified wages capped at $10,000 per quarter times two quarters in 2021. This totals to a maximum ERC of $14,000 per employee in 2021. Furthemore, the CAA also expanded eligibility for ERC to businesses with up to 500 employees from the previous limit of 100 employees. This includes all wages paid to all employees regardless of whether or not they are performing services for the employer.
Finally, under the CAA, the ERC is now available to government employers from January 1, 2021 to June 30, 2021 if the employer is described in Internal Revenue Code (IRC) Section 501(c)(1) as exempt under IRC Section 501(a), or the employer is a college or university or an organization whose principal purpose or function is providing medical or hospital care. Initially, under CARES Act, federal, state, or local government employers were excluded from ERC claims.
According to the guidelines issued by the Internal Revenue Service in January, employers who received a PPP loan that included wages paid in the second or third quarter of 2020 that were recognized as payroll costs but were not forgiven may claim the ERC related to those qualified wages on the employer’s fourth-quarter 2020 Form 941. However, employers are not required to do the same to claim their ERC for 2020 and may choose to file amended payroll returns for the second and/or third quarter of 2020 instead.
If you have any questions or require professional assistance in processing your ERC, please reach out to your trusted team at Stephano Slack at firstname.lastname@example.org. You may also visit www.stephanoslack.com/services/ to learn more about how we can help your business.