Employee Retention Credit
Updated: Mar 22, 2021
Previously, an employer needed to choose between taking the Employee Retention Credit (ERC) OR participating in the Payroll Protection Program (PPP) loan program. On December 27th, 2020, the Taxpayer Certainty and Disaster Tax Relief Act was signed into law. This enables employers to take the ERC, retroactively, for qualifying wages paid after March 12, 2020, even if they received a PPP loan and extended benefits in 2021.
2020 Employee Retention Credit Guidelines.....
Under the original CARES act, private sector employers were allowed a refundable tax credit against employer Social Security tax equal to 50% of wages paid after March 12th, 2020, up to $10,000 per employee (i.e. – credit of $5,000 per employee). Employers qualified if their operations were partially or fully suspended due to a governmental mandate related to COVID-19 or if the business could show a 50% decline in gross receipts compared to same quarter of previous year (2019).
Please note there are different statues defining eligible employees wages based on whether the business were classified as small or large. For 2020, small businesses (100 employees or less) were allowed to include all employees in regards to determining ERC wages. Large businesses (more than 100 employees) were only allowed to use wages that were paid to employees who were not working or providing services – Paid time off.
In order to retro actively claim the ERC, employers will need to amend their 941 filings for 2020. The IRS provided a “limited 4th quarter procedure” that allowed employers to include qualifying wage amounts from Quarters 2 & 3 on the 941 form. However, this guidance was released as of January 22nd, 2021 and many of us had already filed 4th Quarter of 2020. Therefore, most businesses will need to file a 941X (Amended) for the quarters they wish to claim the ERC.
Wages paid with and used for PPP Loan forgiveness do not qualify as ERC wages. Eligible wages can be used for either PPP loan forgiveness or ERC, but not both.
2021 Employee Retentions Credit Guidelines.....
This act extended and modified the ERC in terms of timeline, credit amount and eligibility. The period has been extended from January 1 through June 30, 2021. It expands the credit to 70% (previously 50%) of qualified wages. The wage limit is increased from $10,000 per year to $10,000 per quarter with the maximum credit per employee for 2021 is $14,000.
Employers are eligible if they show a 20% (previously 50%) decline in gross receipts compared to same quarters of previous years (2020 or 2019) or if the employer’s operations are still partially or fully suspended due to governmental mandates.
For 2021, eligibility is expanded from private owned business to certain public organizations - colleges, universities and hospitals. Local School Districts were not included in this expanded eligibility. The classification of small vs large business was also adjusted. Small business designation increased from 100 or less to 500 or less.
Again, any wages paid with and used for the PPP loan (1st or 2nd offering) are not eligible for the Employee Retention Tax Credit.
Employers should consult with appropriate legal and tax advisors to determine if they are eligible for ERC in 2020 or 2021 and for assistance navigating the different rules that apply to both years. To review additional IRS guidance, please see link below: