This blog was updated 4/7/21
First introduced under the CARES Act in March 2020, the Employee Retention Credit (ERC) is a fully refundable tax credit that benefits eligible employers who have continued to pay employees while experiencing COVID-19 economic or operational difficulties. The credit under the CARES Act expired after December 31, 2020; however, the credit was modified and extended through June 30, 2021, by the Consolidated Appropriations Act and subsequently extended until December 31, 2021, by The American Rescue Plan Act.
The original and the expanded ERC have similar concepts and computations, but the modifications were intended to allow more businesses to benefit from this credit. Below are five common questions (and answers) regarding the ERC.
1. Which Employers are Eligible for the Employee Retention Credit?
To be considered an eligible employer qualified for the credit, a business must have experienced one of the following two events during the credit period:
- Government Mandated Suspension. This must be either a full or partial suspension of a trade or business due to orders from a governmental authority that limited commerce, travel or group meetings due to COVID-19.
- Substantial Gross Receipts Reduction. A company must have had a reduction of gross receipts in a calendar quarter when compared to the same calendar quarter in 2019. Gross receipts must be determined at a controlled group level, which means all businesses under the same ownership umbrella must be combined to determine the reduction. The reduction in gross receipts must be greater than 50% in 2020 and 20% in 2021. For the 2021 credit, businesses not in existence in 2019 may compare the same calendar quarter in 2020 or elect to test the calendar quarter immediately preceding the calendar quarter in which they are claiming the ERC.
2. What Wages Qualify for the Employee Retention Credit?
Eligible employers with 100 and 500 full time employees or fewer for 2020 and 2021, respectively, may claim the credit on wages paid to all employees, which includes qualified health plan expenses. If an eligible employer is above the full time employee threshold, only wages paid to employees not performing services during the calendar quarter qualify for the ERC.
Employee Retention Tax Credit 2020 & 2021 Comparison
||March 13, 2020 - December 31, 2020
||January 1, 2021 - December 31, 2021
||1) Gov’t Orders resulting in full or partial suspension of business operations during any calendar quarter
2) Significant decline in gross receipts for the calendar quarter compared to the same calendar quarter in 2019.*
||Greater than 50% decline
||Greater than 20% decline
||Small Employer (defined below): Wages paid to all employees
|Large Employer: Wages paid to employees not performing services
||100 or fewer employees
||500 or fewer employees
||50% of qualified wages
||70% of qualified wages
||$5K per employee per year
||$7K per employee per quarter
|Claiming the Credit
*For the 2021 credit a business that was not open in 2019 can compare gross receipts for the 2021 calendar quarter to the same calendar quarter in 2020.
Qualified wages are limited to $10,000 per employee. However, while the 2020 ERC limited qualified wages to $10,000 for the entire year, limit for 2021 is $10,000 per calendar quarter.
3. How Much of the Employee Retention Credit Can a Business Claim?
The available credit is based on a certain percentage of qualified wages. The 2020 ERC is 50% of qualified wages, while for 2021 it is 70% of qualified wages.
>> Review our Employee Retention Tax Credit Flow Charts for 2020 and 2021 Quarters
4. If You Have a PPP Loan, Can You Still Claim the Employee Retention Tax Credit?
Originally, employers who were granted a Payroll Protection Program loan (PPP) were ineligible to claim the ERC. However, the Consolidated Appropriations Act altered this rule to retroactively allow an employer to benefit from both programs. Note that the same wages cannot be used to benefit from both programs though. As qualified wages may only be a portion of qualified expenditures used to claim PPP forgiveness, consider the ERC benefits before applying for PPP forgiveness to help ensure you obtain the maximum benefit.
5. How Can Businesses Claim the Employee Retention Credit?
To claim the ERC, you must report qualified wages on your quarterly employment tax return, Form 941. If you’ve already filed Form 941 and did not report qualified wages, you can amend the form. As an employer, your share of social security tax will be reduced by the computed credit, and any excess credit will be refundable. Rather than receiving a refund, you may retain a certain portion of all other employment taxes that would have otherwise been deposited.
If you believe you may be eligible for the credit, work closely with your tax advisors on how to appropriately calculate and claim it for your business.
Contact a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.