Updates to the Employee Retention Tax Credit
Below you will find a summary outlining the three Acts impacting the Employee Retention Credit (ERC), including the most recent changes implemented by the American Rescue Plan Act of 2021.
The Coronavirus Aid, Relief, and Economic Security Act (CARES) enacted on March 27, 2020 provides an Employee Retention Credit to employers to keep their employees on payroll. An eligible employer could qualify if it meets either of the two eligibility tests:
- The employer’s operations were fully or partially suspended due to a COVID governmental order, or
- The employer incurred a greater than 50% decline in gross receipts during a 2020 Calendar quarter compared to same Calendar quarter in 2019. Many businesses were affected starting in the second quarter 2020.
The Credit is a refundable payroll tax credit of up to $5,000 per employee per year, based on $10,000 of qualified wages paid within the eligible period. The qualified wages include the employer’s qualified health plan expenses paid on behalf of employees, that are properly allocable to the wages associated with that time period. The retroactive credit can be claimed by amending the form 941.
The Consolidated Appropriations Act of 2021 (CAA) enacted December 27, 2020 extends the ERC to Q1 and Q2 of 2021, and also provides that an Employer may be eligible for both PPP loan and the ERC, as long as they meet the eligibility criteria and do not use the same wages for both programs.
In addition, the Consolidated Appropriations Act also:
- Increases the threshold for the number of full-time employees from 100 to 500 for claiming the credit.
- Reduces the gross receipts reduction requirement from 50% to 20%.
- Expands the tax credit from 50% to 70% of qualified wages (i.e., up to $7,000 refundable tax credit per employee per quarter).
To understand the importance of the impact that the Employee Retention credit can have on a business, let us take an example: In Q1 2021, an Employer has 10 employees with $10,000 of qualified wages per employee (i.e., $100,000 of qualified wages for the quarter). This would result in an Employee Retention credit of $70,000 for the quarter.
The American Rescue Plan Act of 2021 (ARPA) enacted on March 11, 2021 extends the ERC up to December 31, 2021. In addition, an employer that is a recovery start up business is limited to $50,000 of ERC per quarter. A recovery startup business is one that began its business after February 15, 2020, with annual gross receipts that average less than $1M, and experienced either a full (or partial) suspension of its business because of a government order due to COVID-19 or a significant decline in gross receipts.
Is your business eligible?
To summarize, we encourage our clients to determine if they are eligible for the Employee Retention Credit. If so, we can assist with the calculation. Ultimately the retroactive credit for 2020 is claimed by amending form 941 and your payroll service will be preparing your amended return. For 2021, the credit can be claimed on each quarters form 941 tax returns for or could be claimed as an advance by completing Form 7200, for employers with less than 500 full time employees.
Many businesses affected by COVID 19, may be eligible even if they received PPP funds. The ERC can be of a great benefit to employers by helping them with their cash flow. However, the eligibility rules and calculations can be complicated.
We are constantly updating our COVID-19 Resource Center with information as changes are being made. For help assessing your situation, contact your tax professional on 973.298.8500.