In response to the financial impact of the COVID-19 pandemic, the CARES Act established the employee retention credit (ERC) to encourage employers to keep employees on the payroll. The credit has been expanded and increased for 2021, but it’s also not too late for employers who are eligible for the ERC to amend their 2020 employment tax returns to take full advantage of the break if they haven’t already.
The CARES Act provided eligible employers with a refundable tax credit of up to $5,000 per employee against the employer’s share of Social Security taxes. The credit equaled 50% of up to $10,000 of qualified wages per employee paid from March 13, 2020, through December 31, 2020. The ERC is calculated on a separate quarter-by-quarter basis and is claimed on your quarterly IRS Form 941 payroll tax return.
Employers were eligible for the ERC for any quarter if either:
- Their operations were fully or partially suspended under a COVID-19-related governmental order, or
- They suffered a significant decline in gross receipts.
A significant decline occurred if gross receipts in a 2020 calendar quarter were less than 50% of gross receipts in the same calendar quarter of 2019. If an employer qualified for the ERC because of such a decline, it continued to qualify in 2020 until the end of the quarter its gross receipts went above 80% of the comparable quarter in 2019.
For employers with more than 100 full-time employees, qualified wages were limited to wages paid to employees who weren’t working. Smaller employers, however, could claim the credit for all employees, regardless of whether they continued to work. However, employers who received Paycheck Protection Program (PPP) loans weren’t eligible for the ERC.
The Consolidated Appropriations Act (CAA), signed into law in December 2020, extended the ERC to wages paid in the first two quarters of 2021. It also increased the available credit from 50% of up to $10,000 in qualified wages for the year to 70% of up to $10,000 in qualified wages per quarter.
The law expanded eligibility for the credit by defining a significant decline as gross receipts in a 2021 calendar quarter that are less than 80% of gross receipts in the same calendar quarter of 2019. Employers that didn’t exist in 2019 may use the corresponding quarter in 2020 to measure their decline in gross receipts in 2021. And certain employers may use the immediately preceding calendar quarter.
The CAA also increased the small employer cutoff criteria from 100 to 500 full-time employees. Now employers with 500 or fewer employees may claim the credit for qualified wages paid to eligible employees, regardless of whether they continued working.
Expanded 2021 updates
In March 2021, the American Rescue Plan Act (ARPA) extended the ERC to qualified wages paid through the end of 2021. So, an employer eligible for the ERC in all four quarters of 2021 can potentially receive credits totaling $28,000 per employee for 2021 (70% × $10,000 × 4). However, by the time you’re reading this, Congress may have eliminated the ERC for the fourth quarter of 2021 as part of an infrastructure bill. Contact your tax advisor to confirm.
The ARPA also expanded who is eligible for the ERC in the third and fourth calendar quarters of 2021 to these additional employers:
Recovery startup businesses. These are employers that: 1) opened their doors after February 15, 2020, 2) have annual gross receipts of $1 million or less, and 3) aren’t otherwise eligible for the ERC. Employers may claim the credit for the last two quarters of 2021, up to a maximum credit of $50,000 per quarter in the aggregate.
Severely financially distressed employers. This includes employers whose gross receipts in a calendar quarter have declined by more than 90% from the same quarter in 2019 (or, in some cases, the same quarter in 2020 or the immediately preceding quarter). Even employers with more than 500 employees may claim the credit for all wages, regardless of whether employees continue working.
Am I Eligible for the ERC?
Significantly, the CAA expanded who is eligible for the ERC to include PPP loan recipients, both prospectively and retroactively to March 13, 2020, as long as the credit isn’t based on wages paid with a forgiven PPP loan. Your total ERC for 2020 and 2021 may add up to a significant amount for each employee you kept on the payroll. Contact one of our CPAs and/or your payroll processing company for help if you’d like to amend your IRS filings.