At the start of the pandemic crisis in the U.S., the government created two programs to encourage businesses to keep their employees on payroll: the Paycheck Protection Program and the Employee Retention Credit. The first is a loan program through which businesses could get funds to cover their employees’ salaries and pay other key expenses. The second is a tax credit for a percentage of employees’ wages.
Up to now, if you got a PPP loan, you couldn’t apply for the ERC. But with the new stimulus package passed in December, that’s all changed: Business owners can now get both. Below, after a brief explanation of the ERC, we dive into the details of how the ERC has changed with the new stimulus package.
What is the Employee Retention Credit?
The ERC was first created by the CARES Act, which passed in March 2020, and has been extended and expanded by the Consolidated Appropriations Act of 2021 (CAA21), passed in December 2020.
The Employee Retention Credit (ERC) is a refundable payroll tax credit employers can receive to offset the cost of wages, payroll tax deposits, and health care coverage during the pandemic. A tax credit that is “refundable,” it is given as a refund if the amount of the credit exceeds the amount of the tax liability. For example, if you qualify for an ERC of $10,000 and your tax liability is $15,000, you would owe the IRS $5,000. If you qualify for an ERC of $10,000 and your tax liability is only $5,000, you would receive $5,000 as a tax refund.
The ERC allows employers to get a tax credit for a portion of wages paid during the pandemic if they had to reduce or suspend business hours or operations due to a government order, or if they had a significant decline in business. For example, if gyms were closed in your city or state but as a gym owner, you chose to continue to pay your yoga instructors, you might be eligible for the ERC and could get a tax credit for wages you paid during the shutdown. (Below is a more detailed explanation of the qualification rules.)
The purpose of the ERC is to encourage employers (including tax-exempt entities) to keep employees on their payroll and continue providing health benefits during the coronavirus pandemic. One of the biggest changes in the new legislation is that employers who received a PPP loan are now also eligible for the ERC, and that this change is retroactive to March 2020.
By expanding the eligibility, extending the credit, and increasing various limits, this legislation has the potential to significantly bolster businesses hurt by the pandemic. By taking advantage of the ERC, depending on the number of employees and the amount of money paid to them, employers could get credits for thousands of dollars (maybe more).
Changes to the ERC in the New Stimulus Package
CAA21 makes the following retroactive changes to the ERC, which apply during the period of March 13, 2020 through December 31, 2020:
- Employers that received PPP loans may qualify for the ERC for wages that were not paid with proceeds from a forgiven PPP loan.
- CAA21 clarifies how tax-exempt organizations determine “gross receipts.”
- Group health care expenses are considered “qualified wages” even when no other wages are paid to the employee.
- Employers that received a PPP loan and that were previously prohibited from claiming the ERC may now retroactively claim the ERC for 2020.
- With respect to the retroactive measures in CAA21, employers that paid qualified wages in Q1 through Q3 2020 may elect to treat the qualified wages as being paid in Q4 2020. This should allow employers to claim the ERC in connection with such qualified wages via a timely filed IRS Form 7200 or Form 941, as opposed to requiring an amended return (IRS Form 941-X) for the prior quarter(s) in 2020.
ERC for 2021 (January 1 – June 30, 2021)
In addition to the retroactive changes listed above, the following changes to the ERC apply for the period from January 1 to June 30, 2021:
Increased Credit Amount and New Rules for Calculating Credits
- The previous ERC rate was 50%, which meant you could apply for a tax credit equal to 50% of qualified wages. In this new package, the rate is increased from 50% to 70% of qualified wages.
- The limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.
- Eligible employers with 500 or fewer employees may now claim up to $7,000 in credits per quarter, paid to all employees, regardless of the extent of services performed. Previously this rule was applicable to employers with 100 or fewer employees and a maximum of $5,000 in credit per employee per year.
- Employers that previously reached the tax credit limit on some of their employees in 2020 can continue to claim the ERC for those employees in 2021 to the extent the employer remains eligible for the ERC.
Broadened Eligibility Requirements
- Employers must now only show a 20% decline in gross receipts (when comparing either the calendar quarter or the prior quarter to the corresponding quarter in 2019) in order to qualify for the ERC, which is less than the previous requirement of at least 50%.
- Employers whose businesses did not exist in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.
- The credit is available to certain government instrumentalities, including colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress.
Advance Payments
- Under rules to be drafted by the Treasury Department, employers with less than 500 full-time employees will be allowed advance payments of the ERC during a calendar quarter in which qualifying wages are paid. Special rules for advance payments are included for seasonal employers and employers that were not in existence in 2019.
The changes to the ERC provide an opportunity for businesses to recoup some expenses paid during the pandemic, but the interplay between the new stimulus package, the CARES Act and various Internal Revenue Code sections is nuanced and complicated, so reach out to us at info@sbfcpa.com if you have questions on whether your business qualifies for ERC and how to get started.