The Employee Retention Credit (ERC) was originally created as part of the CARES Act, passed in March of 2020. This was a refundable payroll tax credit to be taken against quarterly employment taxes for qualified wages paid after March 12, 2020 and before January 1, 2021.
Under the recently passed Consolidated Appropriations Act of 2021, the credit was extended, and some significant changes were introduced. See below for a comparison chart of the Employee Retention Credit as originally created by the CARES Act versus the Consolidated Appropriations Act of 2021:
|Under the Original Provisions of the CARES Act||Under the Consolidated Appropriations Act of 2021|
|The credit was originally available to taxpayers who either:|
1) had a reduction in gross receipts of 50% for a quarter in 2020 compared to the same quarter in 2019 (the qualifying period ends when quarterly gross receipts then exceed 80% of gross receipts for the same calendar quarter in 2019), or
2) there was a full or partial suspension of the business due to a government order.
This is referred to as the gross receipts test.
|The gross receipts test no longer requires a decrease in gross receipts from the same quarter in the previous year of 50%.|
For 2021, the gross receipts test is met if the gross receipts for that quarter are less than 80% of the same quarter in 2019 (not the previous year, which would be 2020).
If the business was not in existence for the comparison quarter of 2019, the same quarter in 2020 may be substituted. In addition to this a safe harbor has been added, allowing employers to elect to use prior quarter gross receipts to meet the test.
|The credit was originally for qualifying wages paid after March 12, 2020 and before January 1, 2021.||The new legislation extends the credit to apply to qualified wages paid after March 12, 2020 and through July 1, 2021.|
|Employer with 100 full time equivalent (FTE) employees or less could qualify for the credit for all wages paid to an employee even if the employee was still working.|
Employers with more than 100 FTE employees could only take the credit for employees who were not providing services.*
*Employees who had been furloughed or had a reduced working schedule but were still being paid their full rate.
|Employers can now qualify for the credit if they have 500 FTE employees or less for all wages paid to an employee even if the employee is still working.|
Employers with more than 500 FTE employees can only take the credit for employees who are not providing services.*
*Employees who have been furloughed or have a reduced working schedule but are still being paid their full rate.
|Employers could not previously qualify for both the ERC and a PPP loan and were forced to choose one or the other to apply for.||Employers can now claim the ERC even if they received a PPP loan. This change is effective retroactively.|
However, qualifying wages do not include those that were paid for with forgiven PPP loan proceeds, so there is still no double dipping.
|Eligible employers could qualify for a fully refundable tax credit equal to 50% of qualified wages paid to employees, up to a maximum amount for each employee for all calendar quarters of $10,000. |
I.e. The maximum credit amount per employee was $5,000.
|The amount of the credit has increased to 70% of qualified wages up to a cap of $10,000 for each calendar quarter (instead of for the entire calendar year).|
I.e. The maximum credit amount per employee is $14,000 (for the first two quarters of 2021).
What are eligible wages?
Wages that are eligible for the Employee Retention Credit are those that are countable for Social Security purposes as defined in IRC 3121(a) and 3231(e), and health plan expenses paid on behalf of an employee. Eligible wages include, but are not limited to:
- Salaries and wages,
- Cash tips,
- Bonuses and commissions,
- Vacation pay,
- Employer provided sick pay, and
- Health plan expenses paid on an employee’s behalf and are excluded from the employee’s gross income.
The new legislation also removes the 30-day wage limitation rule, which previously capped qualified wages paid to any employee at what the employee would have been paid for working an equivalent duration during the previous 30-day period. The removal of this limitation allows employers to claim the credit for bonuses paid, up to the $10,000 cap per quarter.
What wages are not eligible?
Wages paid to related individuals are not qualifying wages for purposes of the Employee Retention Credit. A related individual as defined by IRC 51(i)(1) includes:
- A child or descendant of a child,
- A brother, sister, stepbrother or stepsister,
- A father or mother, or an ancestor of either,
- A stepfather or stepmother,
- A niece or nephew,
- An aunt or uncle,
- A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
A related individual also includes any person, as previously listed, who owns directly or indirectly more than 50% in value of a corporation’s outstanding stock, or an entity’s capital and profits interest.
Self-employed individuals can NOT claim the credit for their self-employment services/earnings.
Eligible entities not required to meet the gross receipts test
Entities can still be eligible for the ERC even if they do not meet the decline in quarterly gross receipts thresholds, if operations were fully or partially suspended by a governmental order during the quarter.
Changes to eligibility that allows employers to qualify for both the PPP loan and the Employee Retention Credit
One of the biggest changes that came from the Consolidated Appropriations Act of 2021 is that employers can claim the ERC even if they received a PPP loan. We are awaiting further guidance on how an eligible employer who would have been eligible for the ERC for 2020 can go back and claim the credit. I.e. Whether they will be expected to file amended Forms 941X, or if the calculation would be run through the current quarter Form 941.
No double dipping
Taxpayers can NOT claim the following credits for wages used to determine the Employee Retention Credit:
- IRC 41 Credit for Increasing Research Activities
- IRC 45S Employer Credit for Paid Family and Medical Leave
- IRC 51 Work Opportunity Credit
- IRC 1396 Empowerment Zone Employment Credit
Also, the same wages used to qualify for the ERC can NOT be included in qualified costs for the PPP loan forgiveness application.
All entities that are treated as a single employer under IRC 52(a) or IRC 414(m) or IRC 414(o) are treated as a single employer for purposes of the Employee Retention Credit.
Employers using Professional Employer Organizations (PEOs)
For entities that use a professional employer organization that acts as a third-party payer of ’employees’, the entity that can claim the Employee Retention Credit is the one who is using the employees, not the PEO. The employer will claim the credit on Form 7200 and will need to provide the PEO with copies so they can reconcile the amounts on the Form 941s filed for those employees’ wages.
Redesigned Form 941
Form 941 has been redesigned to allow for reporting and reconciliation of the various payroll tax credits (including the ERC) created by the CARES Act and other recent legislation related to Covid-19. The expanded form will reconcile what the tax amount would have been, against the amount being retained by the employer due to a credit, and if there was any advance payment claimed on Form 7200 (as discussed below).
The new legislation permits employers to receive the credit in advance. The IRS has issued Form 7200 ‘Advance Payment of Employer Credits Due to Covid-19’, which can be used by qualifying employers to expedite the refund of the Employee Retention Credit (this form can also be used to claim a refund of the qualified sick and family leave credit).
To the extent an employer has eligible tax credits for a quarter that are greater than the amount of employment tax deposits that would otherwise be due by the employer during the quarter, the employer can file Form 7200 to request the advance payment of the excess credits from the IRS.