Employee Retention Tax Credit – Are You Eligible Now?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Employee Retention Credit (ERC), a refundable tax credit that provided incentives to eligible employers to retain employees during the COVID-19 pandemic.  Upon enactment the ERC credit was available only to businesses that did not receive a forgivable Payroll Protection Program (PPP) loan.  However, in December of 2020, the Consolidated Appropriations Act (CAA) eliminated this limitation, making the ERC retroactively available to businesses to claim the ERC credits even if a PPP loan was received, which could result in significant refundable tax credits for businesses.  Additionally, the American Rescue Plan Act (ARPA) was passed on March 11, 2021, and both expanded and extended the eligibility of the ERC, extending the ERC credits through December 31, 2021, where the ERC credits were set to expire June 30, 2021.

To qualify for the ERC, a business must have experienced either (1) a full or partial suspension of business operations for any calendar quarter in 2020 or 2021, or (2) a significant decline in gross receipts during a calendar quarter in 2020 or 2021 compared with that of the same quarter in 2019.  For 2020, a significant decline in gross receipts is defined as a reduction of more than 50% in a calendar quarter in 2020 compared to the same calendar quarter in 2019, and the “significant decline” period remains until the quarter after gross receipts are “restored” where the 2020 calendar quarter exceeds 80% of gross receipts in the same 2019 calendar quarter.  For 2021, the requirement for a “significant decline” in gross receipts was modified to a more than 20% reduction in a calendar quarter compared to 2019, which is a very significant change from the original “more than 50%” requirement for the 2020 ERC credits.

The ERC works as a refundable payroll tax credit for eligible businesses, calculated as a percentage of qualified wages paid to employees during an eligible period.  Employers claim the credit on quarterly payroll tax returns, and it can provide immediate relief by reducing payroll tax deposits.  For 2020, the ERC credit is equal to 50% of qualified wages paid of up to $10,000 per employee for all quarters, for a maximum credit of $5,000 per employee for 2020.

For 2021, the ERC credit was increased to 70% of qualified wages of up to $10,000 per employee per quarter, for a maximum credit of $7,000 per employee per quarter, or a total of up to $28,000 per employee for 2021.

For 2020, for employers with under 100 employees, considered small employers, all wages and health care costs paid during the eligible periods are considered qualified wages. For employers with over 100 employees, considered large employers, only wages and health care costs paid to employees not performing services during the eligible quarters are considered qualified wages, meaning if employees were paid not to work. For 2021, the rules are the same with the exception that the number of employees to distinguish between small and large employers increased from 100 to 500.

Since the recent changes to the 2020 ERC credits are retroactive, amended quarterly payroll tax returns may need to be filed, and the Internal Revenue Service have put simplified procedures in place to make the credit claims less burdensome.  For 2021, there are different options to claim the credit for the quarters where payroll returns have not yet been filed.  Employers may reduce the amount of Federal employment tax deposits by the amount of credit based on qualified wages.  An employer may also claim the refundable portion of the credit in advance when the ERC credit exceeds the amount of required payroll tax deposits.

While the Consolidated Appropriations Act (CCA) allows employers to claim both ERC and a PPP loan, an employer cannot receive both benefits for the same wages.  Dannible & McKee can help you maximize your refundable Employee Retention Credits and assist you with the interaction between the ERC credits and your PPP loan forgiveness.  Contact a Dannible & McKee representative for further assistance with the refundable ERC for both 2020 and 2021.

Contributing author: Brian J. Potter, CPA, CDA, is a tax partner at Dannible & McKee, LLP.  Brian has over 15 years of experience providing tax and consulting services to a wide range of clients.  He has extensive experience in individual and corporate tax planning, financial planning, multi-state taxation, research and development tax credits, New York State income tax credits and ownership transition advisory.