Retroactive Application of the Employee Retention Credit
With the passage of recent tax reform, Congress made the application of the Employee Retention Credit (ERC) retroactive to include recipients of Payroll Protection Program (PPP) loans in 2020. Prior to this date, the law only allowed taxpayers to claim either the PPP or ERC. Current law allows taxpayers to amend previously filed 2020 payroll tax returns to claim the ERC credit. Please note that businesses cannot utilize the same wages under both the PPP and ERC programs. For example, if a company had $150,000 in wages during 2020 and then utilized $100,000 of those wages to substantiate their PPP loan forgiveness, they could only claim $50,000 of qualified ERC wages.
What is the Employee Retention Credit?
The ERC is a fully refundable tax credit for employers equal to 50% of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. In 2020 the ERC is applicable for qualified wages paid after March 12, 2020, and before January 1, 2021, however the maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000. Expanding on the prior example where the business had $50,000 in available ERC wages, if there were five employees each making $10,000, the company could claim a $25,000 ERC credit (5-employees * $10,000 employee limit * 50%). If the company only had one employee who was paid the full $50,000 in qualified ERC wages, they would be limited to only a $5,000 ERC credit ($10,000 employee limit* 50%).
There is good news to report on the 2021 ERC version, as the limits have been increased. The ERC is computed similarly but the amount of the credit for 2021 is now 70% of qualifying wages paid up to $10,000 per quarter/per employee throughout all four quarters of 2021. Keeping with the one employee example above, the company is eligible for a maximum $7,000 credit for a total of $28,000, in comparison to the 2020 ERC where the company was limited to $5,000 for the year.
In 2021 the credit limit changes depending on the size of the company:
- For employers with more than 500 employees, this credit is only available for wages paid to employees that were paid not to work. An exclusion exists for “severely financially distressed employers,” defined as those experiencing a gross receipts reduction of more than 90% as compared to the same quarter in 2019, who will be able to ignore this limitation regardless of the size of the employer and number of employees.
- For employers with 500 or less employees, all wages qualify for the credit without regard to whether the employee worked. In 2020 the size for the different qualifications was over/under 100 employees.
Are you eligible for the credit?
Eligible employers for the purposes of the Employee Retention Credit are employers that carried on a trade or business during calendar year 2020, including tax-exempt organizations, that either:
- Fully or partially suspended operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19. See IRS FAQ’s for additional guidance.
- Experience a significant decline in gross receipts during the calendar quarter, which for the 2020 credit is defined as 50% or greater decline in gross receipts compared to the same calendar quarter in 2019. For 2021, the decline in gross receipts is reduced from 50% to 20% as compared to the same calendar quarter in 2019. See IRS FAQ’s for additional guidance.
Note: If you do not meet one of these two criteria, you are illegible for the credit in 2020 and/or 2021. The new law also made the ERC available to businesses that started after February 15, 2020 with the following classification: “recovery start-up business”. They must meet certain criteria to qualify (mainly average annual gross receipts less than $1,000,000). The credit is capped at $50,000 per quarter.
How to claim the credit?
Eligible Employers can claim the ERC with their payroll tax filing, Form 941. Given the retroactive applicability to 2020, taxpayers may amend their previously filed 941 Forms to take the credit. For 2021 employers will claim the 2021 ERC with their quarterly payroll tax filing, Form 941. If the employer’s employment tax obligations are less than the computed ERC, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. We recommend that you discuss this with your payroll provider.
Is there anything else I should know?
If you received or anticipate receiving PPP forgiveness, and you believe that you might qualify for the ERC as an Eligible Employer due to one of the aforementioned factors, we are here, ready to help, please give us a call.