The Employee Retention Credit (ERC) was created under the Coronavirus Aid, Relief and Economic Security (CARES) Act that became law during March 2020. The ERC, a refundable credit based on payroll, was largely overshadowed by the SBA’s Paycheck Protection Program (PPP) due to the forgiveness provisions of the PPP loans. Also, under the CARES Act, companies did not qualify for the ERC if they received a PPP loan.
The ERC was originally set to expire on December 31, 2020 but the Consolidated Appropriations Act (CAA), signed into law on December 27, 2020, extended the ERC to June 30, 2021. CAA also increased the amount of the ERC, amended the CARES Act to clarify certain provisions, and repealed the provision prohibiting PPP loan recipients from qualifying for the ERC. Recently, the IRS has provided additional guidance on the ERC.
Following is a summary of the Employee Retention Credit qualifications and limitations:
To qualify:
- A company’s business operations had to have been fully or partially suspended by any government order related to COVID-19, OR the company had to experience a significant decline in gross receipts during any calendar quarter in 2020 or first or second quarter of 2021 compared to the same calendar quarter in 2019.
- For computing the 2020 ERC – the decline in gross receipts for 2020 calendar quarters, compared to 2019, had to exceed 50%
- For computing the 2021 ERC – the decline in gross receipts for the first two 2021 calendar quarters, (compared to 2019) must only exceed 20%.
- For 2021, an election is available allowing a “lookback” to the preceding quarter if there hasn’t been a 20% decline in either the first or second quarters of 2021 compared to 2019. This provision effectively allows the fourth quarter of 2020 to be substituted for the first quarter of 2021.
- For 2020 credits, average monthly full-time employees during 2019 could not exceed 100.
- For 2021 credits, average monthly full-time employees during 2019 could not exceed 500.
ERC limitations:
- Maximum credit per employee for 2020 was the lesser of $5,000 or 50% of eligible wages.
- Maximum credit for 2021 has been increased to 70% of the first $10,000 of eligible wages per quarter with a maximum credit of $14,000 per employee.
- Eligible wages include qualified health plan costs paid for employees
- Qualified wages do not include emergency sick leave, expanded family leave or any wages for which the employer received a credit under a different program.
- Wages paid to related individuals do not qualify for the ERC.
- PPP loan recipients cannot use wages that were, or are expected to be, used in the PPP Loan Forgiveness application.
Depending on the applicable year, the Employer Retention Credit can be claimed by either reducing payroll tax deposits, filing amended Form 941s, or by applying for an advance refund.
As with other COVID-19 programs, these are complex calculations and further interpretation of these provisions, as well as additional guidance, is expected. We invite you to contact us if you have questions or concerns.
Cullari Carrico LLC remains committed to assisting our clients, friends and communities during these uncertain times and has a dedicated team in place that can assist with any questions you have related to COVID-19 relief programs.