Expanded Employee Retention Credit

The COVID-19 stimulus package signed into law by the President on December 27 contains significant enhancements to the Employee Retention Credit (ERC) enacted under the CARES Act in April 2020. Previously this tax credit was unavailable to recipients of Paycheck Protection Program loans (PPP). That prohibition was lifted with the passing of this new package, and the credit was extended and increased through the first and second quarter of 2021.

The ERC provides employers a 50% (70% in 2021) credit towards the Social Security tax liability associated with up $10,000 of an employee’s qualifying wage. The credit reduces your employer Social Security tax liability for those wages. If your credit is ultimately more than your Social Security tax liability, you will get a refund from the IRS.

For 2021, the ERC qualifications have been reduced, expanding the number of businesses who may qualify. Below is an outline of the ERC program for tax years 2020 and 2021.


2020 Employee Retention Credit:

• A refundable payroll tax credit for 50% of qualified wages of up to $10,000 per employee during 2020 ($5,000 total credit for 2020)
• May be claimed for wages paid after March 12, 2020, and before January 1, 2021
  • group health plan expenses can be considered qualified wages even when no wages are paid to an employee
• If you received PPP funds, wages applied toward forgiveness are excluded from ERC eligible wages
• To be eligible your organization must:
  • have operations fully or partially suspended because of a government order limiting commerce, travel, or group meetings between March 12 and December 31, 2020 OR
  • experienced a greater than 50% reduction in quarterly receipts compared to the same quarter in 2019

2021 Employee Retention Credit:

• Increases the ERC rate to 70% of qualified wages of up to $10,000 per employee for a maximum credit of $7,000 per employee per quarter ($14,000 total credit for 2021)
• Organizations who were not in existence for all or part of 2019 may claim the credit
• Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20%
• To be eligible your organization must:
  • have operations fully or partially suspended because of a government order limiting commerce, travel, or group meetings, OR
  • experienced a greater than 20% reduction in quarterly receipts compared to the same quarter in 2019

Claiming the ERC for previous quarters

If your organization was previously ineligible or unaware of this credit, the Act provides for an election to claim the unrealized credit on the next filed Form 941 instead of amending prior quarter payroll returns. 
 

Advance Payment of Employee Retention Credit

The Act allows an advance payment of the credit for companies with 500 or fewer employees, based on 70% of average quarterly payroll for the same quarter in 2019. In other words, companies may monetize the credit before the wages are paid. If the amount of the actual credit determined at the end of the quarter is less than the amount of the advance payment, the company will need to repay the excess.

If you have any questions regarding the Employee Retention Credit or other pandemic related stimulus programs, please email Will Geeslin at [email protected]