Changes to the Employee Retention Tax Credit (ERC)

The Consolidated Appropriations Act (the Act), which was signed into law on December 27, 2020, contains changes that allow many businesses previously ineligible for the employee retention tax credit to consider applying now. The ERC, a refundable payroll tax credit, can now be claimed by businesses even if they borrowed funds through the Payroll Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. These changes are intended to provide liquidity to employers during the pandemic.

Qualifications include businesses that:

  • Had their business fully or partially suspended due to the orders from the Federal or state government limiting commerce, travel, or group meetings due to COVID-19, OR
  • Experienced a significant decline in gross receipts in calendar quarter 2020 as compared to the same quarter in 2019 (50% decline) or any quarter of 2021 (20% decline).

Following are Enhancements to the Employee Retention Credit:

  • Credit was extended through June 30, 2021.
  • PPP loan borrowers can now claim the ERC credit. However, the same wages cannot be counted for both PPP loan forgiveness and the ERC credit.
  • Certain government entities (public universities and hospitals) can claim the credit.
  • Increases the credit from 50% (in 2020) to 70% (in 2021) of qualified wages.
  • Increases the qualified wage limit from $10,000 for all quarters to $10,000 per quarter for 2021.
  • Reduces the decline in gross receipts from 50% (in 2020) to 20% (in 2021) as compared to a comparable quarter in 2019.
  • Increases the number of employees from 100 to 500 (for 2021 only) before a change in treatment.
    Businesses who meet these criteria must then determine whether they are classified as small businesses or large ones. The Act increases the pool of eligible businesses to those with 500 or fewer employees (as compared to 100 or fewer in the CARES Act).

In determining eligibility and the amount of the ERC, corporate taxpayers may be required to aggregate and consider as one employer:

  • A parent-subsidiary controlled group.
  • A brother-sister controlled group.
  • A combined group of corporations.

Eligible wages are dependent on the number of employees:

  • For eligible small businesses (100 or less employees), wages paid in 2020 are eligible for a 50% credit. That increases to 500 employees and to 70% in 2021.
  • For eligible large businesses, only wages paid to employees who were furloughed or not working qualify for the credit. Otherwise, the limits are the same: 50% for wages paid in 2020 and 70% for wages paid in 2021.
  • Wages paid to some employees who work at a level below their normal qualifications may also qualify.
  • The maximum credit per employee per quarter rises from $5,000 for tax year 2020 to $7,000 per quarter for each of the first two quarters of 2021.

Keep in mind that your 2020 taxes may be affected by whether you can or should claim this credit. This is the time to consider your business’s specific situation. For help assessing your situation, your tax professional on 973.298.8500.