The Consolidated Appropriations Act, 2021 signed into law on December 27, 2020, has made some key changes to the Employee Retention Credit (ERC). One key change to the program is employers who received Paycheck Protection Program (PPP) loans are now eligible for the credit. The same wages cannot be used for both programs; if wages are used for forgiveness under PPP they are not eligible for credit and vice versa. This change is retroactive; therefore, if a company received a PPP loan in 2020 and paid qualified wages in excess of the amount of wages used for PPP forgiveness, the company can claim the credit retroactively under the rules in effect for 2020 (as long as other eligibility requirements are met).
The credit has been extended through July 1, 2021, to include the first 2 quarters of 2021.
To be eligible, as of January 1, 2021:
- The operation of your trade or business is fully or partially suspended during a calendar quarter due to orders from a government authority to COVID-19; or
- Gross receipts show a decline of at least 20% for the same quarter in 2019.
- To be eligible in 2020, gross receipts for a calendar quarter need to be less than 50% of the gross receipts for the same calendar quarter 2019. A business is no longer eligible if, in the calendar quarter immediately following, their gross receipts exceed 80% compared to the same calendar quarter in 2019.
- If you are a new business, the IRS allows the use of gross receipts for the quarter in which you started business as a reference for any quarter which they do not have 2019 figures because you were not in business yet.
- An employer can amend their Form 941 if they determine later that they qualify for the credit.
- CironeFriedberg suggestion: Determine if your business has experienced a decrease in revenue of more than 50% in any calendar quarter during 2020. Work with your financial advisor to help you through the process of determining the eligible wages for the 2020 credit. This can be complex to work through in coordination with the PPP forgiveness calculations.
For 2020, the credit can be claimed against 50% of qualified wages paid up to $10,000 per employee for wages paid between March 13 and December 31, 2020. This applies to business previously exempt from the program due to taking a PPP loan and claiming a retroactive credit.
Employers qualifying in 2021 can claim 70% of qualified wages, up to a maximum of $10,000 of wages per employee per quarter. The amount of credit is limited to $14,000 per employee during the first two calendar quarters. In other words, the maximum credit that can be claimed for an employee is $7,000 ($10,000 eligible wages * 70%) per quarter. The 2021 credit is available even if the employer received the $5,000 maximum credit for an employee during 2020.
The definition of qualified wages (wages plus qualified health expenses) depends on the number of employees.
- If the employer has over 500 (100 prior to 1/1/2021) full-time employees, qualified wages are defined as wages paid to an employee while the employee was not providing services because of suspension or decline in business (vacation and sick pay are excluded from wages). Essentially the credit is available only for employees not working.
- If an employer has less than 500 (100 prior to 1/1/2021) full-time employees, any wages paid during the period of economic hardship are considered qualified wages (cannot take credit on the same wages for paid family medical leave).
- When calculating the 500 employee threshold, the employees of all affiliated companies sharing more than 50% common ownership are aggregated.
Claiming the Credit
The calculated credit is taken against the employer’s share of Social Security taxes and is fully refundable. Therefore, if the credit exceeds the employer’s total liability of the portion of Social Security in any calendar quarter, the excess is refunded to the employer. At the end of the quarter, the amounts of these credits will be reconciled to the employer’s Form 941. Your payroll provider will be able to help you through filing amended 941s.
If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford), or email us at email@example.com.