The Employee Retention Credit
The Employee Retention Credit (ERC) was created as part of the stimulus bill, under the Cares Act, that was signed into law on March 27, 2020. This law allowed employers to take the credit against employment taxes for qualifying wages paid March 13, 2020, through December 31, 2020. Under this original law, if a business received funds under the SBA’s Paycheck Protection Program, they were excluded from taking advantage of the ERC.
However, the Consolidated Appropriations Act signed on December 27, 2020, modified this exclusion by allowing a business to consider if they qualify for the ERC even if they received the PPP funds. This Act further clarified that the payroll dates used for determining forgiveness or the PPP funds could not overlap with the ERC. This new Act also extended the ERC to include qualified wages paid from January 1, 2021, through June 30, 2021.
So who qualifies?
Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:
- A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19
- A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50%).
Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. In addition, for the first and second calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.
Also, effective January 1, 2021, the definition of qualified wages was changed to provide:
- For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
- For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.
Retroactive to the March 27, 2020 enactment of the CARES Act, the law now allows employers who received PPP loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.
For more information, you can visit the IRS website and learn more about COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs.
What’s the maximum amount you can receive?
For 2020, the qualifying wages and healthcare costs for the period starting March 13, 2020, to December 31, 2020.
- The total eligible wages and healthcare costs are $10,000 per employee for the covered period, the credit is 50% for a maximum total of $5,000 credit per employee.
For 2021, the qualifying wages and healthcare costs are still capped at $10,000 per employee, but it is now per quarter for the 1st and 2nd quarter.
- The credit is increased to 70% of qualifying wages and healthcare costs for a maximum credit of up to $7,000 per employee per quarter (1st and 2nd) for a maximum potential credit of $14,000 per employee for both quarters.
How to apply
To claim the new ERC, eligible employers must report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns (Form 941 for most employers), beginning with the second quarter. The credit is taken against the employer’s share of Social Security tax, but the excess is refundable under normal procedures.
Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
If your business has other questions, you can reach out to our team at Gift CPAs to learn more about ERC and if your business qualifies for the credit. To claim the 2020 credit, you can do an amended filing of your fourth quarter 941 return. 2021 credits will be claimed on your first and second-quarter filings.
Please keep in mind that wages paid for the FFCRA are not eligible for the ERC as a credit was already received. Please contact your accountant if you have questions about calculating your eligible credit.