Read this if you are an employer looking for more information on the Employee Retention Credit (ERC).
The Coronavirus Disease 2019 (COVID-19) stimulus package signed into law by President Trump on December 27 makes very favorable enhancements to the Employee Retention Credit (ERC) enacted under the Coronavirus Aid, Relief and Economic Security (CARES) Act.
Background
The CARES Act passed in March 2020 provided certain employers with the opportunity to receive a refundable tax credit equal to 50 percent of the qualified wages (including allocable qualified health plan expenses) an eligible employer paid to its employees. This tax credit applied to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages (including allocable qualified health plan expenses) taken into account with respect to each eligible employee for all calendar quarters in 2020 is $10,000, so that the maximum credit an eligible employer can receive in 2020 on qualified wages paid to any eligible employee is $5,000.
The ERC was for eligible employers who carried on a trade or business during calendar year 2020, including certain tax-exempt organizations, that either:
- Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
- Experienced a significant decline in gross receipts during the calendar quarter.
If an eligible employer averaged more than 100 full-time employees in 2019, qualified wages were limited to wages paid to an employee for time that the employee was not providing services due to an economic hardship described above. If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described above.
Updated guidance: ERC changes
The bill makes the following changes to the ERC, which will apply from January 1 to June 30, 2021:
- The credit rate increases from 50% to 70% of qualified wages and the limit on per-employee wages increases from $10,000 per year to $10,000 per quarter.
- The gross receipts eligibility threshold for employers changes from a more than 50% decline to a more than 20% decline in gross receipts for the same calendar quarter in 2019. A safe harbor is provided, allowing employers that were not in existence during any quarter in 2019 to use prior quarter gross receipts to determine eligibility and the ERC.
- The 100-employee threshold for determining “qualified wages” based on all wages increases to 500 or fewer employees.
- The credit is available to state or local run colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress (including organizations such as Fannie Mae, FDIC, Federal Home Loan Banks, and Federal Credit Unions).
- New, expansive provisions regarding advance payments of the ERC to small employers are included, including special rules for seasonal employers and employers that were not in existence in 2019. The bill also provides reconciliation rules and provides that excess advance payments of the credit during a calendar quarter will be subject to tax that is the amount of the excess.
- Employers who received PPP loans may still qualify for the ERC with respect to wages that are not paid for with proceeds from a forgiven PPP loan. This change is retroactive to March 12, 2020. Treasury and the SBA will issue guidance providing that payroll costs paid during the PPP covered period can be treated as qualified wages to the extent that such wages were not paid from the proceeds of a forgiven PPP loan.
- Removal of the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).
Takeaways
For most employers, the ERC has been difficult to use due to original requirements that prevented employers who received a PPP loan from ERC eligibility and, for those employers who did not receive a PPP loan, the requirement that there be a more than 50% decline in gross receipts. In addition, those employers who qualified for the ERC and had more than 100 employees could only receive the credit for wages paid to employees who did not perform services.
It is important to note that most of the new rules are prospective only and do not change the rules that applied in 2020. The new guidance should make it easier for more employers to utilize the ERC for the first two quarters of 2021. The following types of employers should evaluate the ability to receive the ERC during the first and/or second quarter of 2021:
- Those that used the ERC in 2020 (the wage limit for the credit is now based on wages paid each quarter and the credit is 70% of eligible wages);
- Those that previously received a PPP loan;
- Those that have a more than 20% reduction in gross receipts in 2021 over the same calendar quarter in 2019;
- Those employers with more than 100 but less than 500 employees who have had a significant reduction in gross receipts (i.e., more than 20%)1
For more information
If you have more questions, or have a specific question about your particular situation, please call us. We’re here to help.
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