The Consolidated Appropriations Act, 2021 (CAA) extends and expands the Employee Retention Credit (ERC) first created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The ERC is designed to encourage businesses to keep workers on their payroll and support small businesses and nonprofits through the coronavirus economic emergency.
Eligibility has been expanded to include employers who also received PPP loans. There are two sets of rules: one for those claiming the credit for 2021 wages, and another set of rules for claiming the credit for 2020 wages. To be eligible for the credit, the employer must meet one of two tests: 1) have experienced a significant decrease in revenue, or 2) been under a full or partial government-mandated shutdown.
Credit for 2021 (1st and 2nd Quarters only)
For the first and second quarters of 2021, the amount of the credit is 70% of qualified wages. The limitation per employee is $10,000 per quarter, and therefore the maximum credit per employee is $14,000. Eligible wages are wages paid between January 1 and June 30, 2021 inclusive.
In addition, the definition of an eligible employer is more expansive under the CAA and thereby allows a greater number of employers to qualify.
An eligible employer is defined as:
- An employer whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease (COVID-19); or
- An employer that experiences a 20% or more decline in gross receipts for the calendar quarter compared to the same quarter in 2019. A special rule allows employers to use the prior quarter’s receipts for purposes of qualifying, so if an employer realized a 20% or more decline in receipts for the fourth quarter of 2020 as compared to the fourth quarter of 2019, they qualify for the first quarter of 2021 and don’t have to wait until early April to quantify their revenue decline. If the employer was not in existence as of the beginning of the same calendar quarter in 2019, then the employer may use the same calendar quarter in 2020.
Qualified wages are based on the business’s average number of full-time employees, which are generally defined as any employee who worked an average of at least 30 hours a week in any pay period in 2019.
- Small employers are defined as those that had 500 or fewer full-time employees (up from 100 employees in 2020) in 2019. Small employers may receive the credit for wages paid to any employee, other than owner-employees and their family members.
- Large employers are those that had more than 500 full-time employees in 2019. A large employer may only receive the credit for wages paid to employees for time the employees are not providing services to the employer. Large employers who are paying employees working at a reduced workload may still be able to qualify.
There are special rules for seasonal employers. Also, if an employer is eligible due to a full or partial suspension of operations, only wages paid while operations are suspended count as qualified wages.
Employers must report their qualified wages on their quarterly federal employment tax return, Form 941. They can reduce their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit and can also request an advance of the employee retention credit by submitting Form 7200.
Retroactive 2020 Tax Credits (effective for periods March 13, 2020 through December 31, 2020)
Previously, an employer who received a PPP loan in 2020 was locked out of the ERC program, but that is no longer the case. Employers will need to evaluate whether they meet the eligibility requirements for the 2020 credit and amend their payroll tax returns accordingly to claim the credit.
For 2020, eligibility for ERC is somewhat more restrictive. Employers who were not shut down pursuant to a governmental order must demonstrate at least a 50% decrease in gross receipts for any quarter of 2020 as compared to the same quarter of 2019. Also, the ERC equals 50% of eligible wages paid to an employee, subject to an overall wage cap of $10,000 for the year ($5,000 maximum credit per employee). Wages paid after March 12, 2020 and before January 1, 2021 may be used to calculate the credit.
Employers who received a PPP loan in 2020 and who may now qualify for retroactive ERCs should hold off on filing their PPP loan forgiveness applications, as it may be more advantageous to use a PPP loan covered period of less than 24 weeks in order to maximize eligibility for retention credits.
We can assist you in determining your business’s or organization’s eligibility and also help coordinate the filing of amended returns with your payroll provider.
No Double Benefit, Other Restrictions
There are limitations when considering an eligible employer’s ability to claim the employee retention credit for both 2021 and retroactively to 2020. This credit is impacted by other credit and relief provisions as follows:
- The same wages cannot be used for both PPP loan forgiveness and ERC.
- Qualifying wages for ERC cannot include wages for which the employer received another tax credit, such as the credit for paid sick and family leave, Work Opportunity or Empowerment Zone credits.
- Wages paid to shareholder-employees owning more than 50% of the employing corporation and their family members do not qualify for the credit.
- For income tax reporting purposes, taxable employers must reduce their otherwise deductible wage expense by the amount of credit they receive.
Please be aware that, at this time, we still do not have clear guidance from the IRS and Small Business Administration on the interplay between the qualified wages for PPP loan forgiveness and the qualified wages for claiming the Employee Retention Credit. Due to this lack of guidance, we do not know whether employers, who have applied for and/or received PPP loan forgiveness, can also receive ERC for wages reported on their PPP loan forgiveness application, even if those wages were not fully utilized in determining the amount of loan forgiveness.
- James Brower, Partner, State and Local Tax Leader
- Timothy McMaugh, Director in the Commercial Business Group at Marks Paneth.
Compliments of Marks Paneth – a member of the EACCNY.