Employee Retention Credit Extended & Enhanced
Article Highlights:
Consolidated Appropriations Act, 2021
Interaction between PPP loans and the ERC
About the Credit
Employer Qualifications
Qualified Wages
Impact on Other Tax Provisions
Claiming the Credit
Consolidated Appropriations Act, 2021 and the Interaction between the PPP Loan Program and Employee Retention Credit
The Consolidated Appropriations Act, 2021 (CCA), which was passed by Congress and signed by the president late last December, included a very tax-beneficial provision that liberalized the interaction between PPP loans and the Employee Retention Credit (ERC). Prior to its passage, if an employer obtained a Paycheck Protection Program (PPP) loan, the employer was ineligible to claim the ERC. However, under the legislation, an employer that is eligible for the ERC can claim the ERC even if the employer has received a PPP loan, under the following circumstances.
An eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness.
Any wages that could count toward eligibility for the ERC or for PPP loan forgiveness can be applied to either of these two programs but not both.
This gives rise to some beneficial tax opportunities.
PPP Loan Forgiveness Denied – If an employer received a PPP loan and included wages they paid in the second and/or third quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming the ERC for those wages) and if the request for forgiveness was denied, then the employer can claim the ERC related to those qualified wages retroactively by amending their Forms 941 for 2020. This is done by using Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
Business Qualified but Never Claimed the ERC – If a taxpayer did not obtain a PPP loan, qualified for the ERC in 2020, and did not previously take the payroll credit, they can still do so by filing Form 941-X. Form 7200, which is used to request advance payment of the credit, cannot be used in this situation because it must be filed before the original 941 forms are.
Business Qualified and Received PPP Loan – If a taxpayer obtained a PPP loan, and qualifies for the ERC in the same covered period as the PPP loan, the taxpayer may still be able to claim ERC. Any wages that could count towards eligibility for the ERC or for the PPP loan forgiveness can be applied to either of these two programs but not both. If all qualified wages have already been claimed towards PPP forgiveness, the same wages may not be used for ERC. If all qualified wages have not been claimed towards PPP loan forgiveness, the taxpayer may use the remaining qualified wages for ERC.
About the Credit
For 2020, the credit is a refundable payroll tax credit equal to 50% of qualified wages, up to maximum wages of $10,000 per employee. Thus, $5,000 is the maximum credit for qualified wages paid to any employee for 2020.
Example 1: Eligible Employer pays $10,000 in qualified wages to Employee A in Q2 2020. The Employee Retention Credit available to Eligible Employer for the qualified wages paid to Employee A is $5,000.
Example 2: Eligible Employer pays Employee B $8,000 in qualified wages in Q2 2020 and $8,000 in qualified wages in Q3 2020. The credit available to Eligible Employer for the qualified wages paid to Employee B is equal to $4,000 in Q2 and $1,000 in Q3 due to the overall limit of $10,000 on qualified wages per employee for all calendar quarters of 2020.
For 2021, the credit is a refundable payroll tax credit equal to 70% (up from 50% in 2020) of qualified wages, up to maximum wages of $10,000 per employee per quarter. Thus, $7,000 is the maximum credit per quarter for qualified wages paid to any employee for 2021.
Example 1: Eligible Employer pays $10,000 in qualified wages to Employee A in Q2 2021. The Employee Retention Credit available to Eligible Employer for the qualified wages paid to Employee A is $7,000.
Example 2: Eligible Employer pays Employee B $8,000 in qualified wages in Q2 2021 and $15,000 in qualified wages in Q3 2021. The credit available to Eligible Employer for the qualified wages paid to Employee B is equal to $8,000 in Q2 and $10,000 in Q3 due to the overall limit of $10,000 on qualified wages per employee per quarter for each calendar quarter of 2021.
More about how the ERC works
In order to help trades and businesses to retain employees and keep them employed during the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Employee Retention Credit for 2020. As part of the Consolidated Appropriations Act, 2021 (CCA), the credit has been extended through December 2021 (Pending legislation could change this date, and end the credit early.)
The credit is actually a government-sponsored program to keep workers employed and is funded by providing qualifying employers with a refundable credit against certain employment taxes equal to 70% (up from 50% prior to 2021) of the qualified wages that an eligible employer pays to employees after March 12, 2020, and before January 1, 2022. (Pending legislation could change this date, and end the credit early.) (Before the extension, the credit ended on December 31, 2020.)
If the employer's employment tax deposits are insufficient to cover the credit, the employer may get an advance payment from the IRS by filing Form 7200, Advance of Employer Credits Due to COVID-19.
For each employee, up to $10,000 in wages (including certain health-plan costs) per quarter (versus $10,000 per year in 2020) can be counted to determine the amount of the 70% credit.
Employers, including tax-exempt organizations, are eligible for the 2021 credit if they operate a trade or business between January 1, 2021, and December 31, 2021, and experience either:
The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19; or
A significant decline in gross receipts.
A significant decline in gross receipts for 2021 occurs when an employer’s gross receipts for a calendar quarter are less than 80% of its gross receipts for the same calendar quarter in 2019 (in other words, when gross receipts for the 2021 quarter are reduced by more than 20% of the corresponding 2019 quarter’s gross receipts).
If the business didn’t exist at the beginning of the same calendar quarter in calendar year 2019, substitute “2020” for “2019.”
Employers, by election, can apply the gross-receipts test by using the immediate preceding calendar quarter. For example, instead of comparing the gross receipts of the first quarter of 2021 with those of the first quarter of 2019, an employer can elect to compare the gross receipts of the fourth quarter of 2020 to the gross receipts from the fourth quarter of 2019.
The credit applies to qualified wages (including certain group health-plan expenses) paid during this period or any calendar quarter when operations were suspended. Eligible health-plan expenses are the amounts paid by the employer to provide and maintain group health-plan coverage, to the extent that the amounts are nontaxable to the employees.
Qualified Wages
The definition of qualified wages depends on how many employees an eligible employer has. For the 2021 credit, if an employer averaged more than 500 full-time employees during 2019 (versus 100 for the 2020 credit), qualified wages are generally the wages, including eligible health-care costs (up to $10,000 per employee per quarter) paid during that quarter to employees who were not providing services because they were laid off or furloughed.
If an employer averaged 500 or fewer full-time employees during 2019 (versus 100 for the 2020 credit), qualified wages are wages, including eligible health-care costs (up to $10,000 per employee per quarter), paid to any employee during the quarter when operations were suspended or for which the decline in gross receipts applies, regardless of whether its employees were providing services.
The rules for claiming credits based on the payment of “qualified health plan” expenses for eligible employees are retroactive to March 23, 2020. If, as a result of these changes, additional credits are due to an employer for prior calendar quarters based on the payment of qualified health-plan expenses, then those credits are to be claimed when filing IRS Form 941 for the fourth quarter of 2020.
Impacts of Other Credit and Relief Provisions
An eligible employer's ability to claim the Employee Retention Credit is impacted by other credit and relief provisions as follows:
If an employer receives a Small Business Interruption Loan under the Paycheck Protection Program, as authorized under the CARES Act, then the employer was not eligible for the Employee Retention Credit in 2020. However, the CCA changed this rule, retroactive to March 23, 2020, and borrowers of PPP loans are now eligible to claim the Employee Retention Credit. However, to the extent that an eligible employee’s wages are used to substantiate the forgiveness of a PPP loan, those same wages cannot also be used to claim the Employee Retention Credit.
Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act.
Wages counted for this credit can't be counted toward the credit for paid family and medical leave.
Employees are not counted toward this credit if the employer is allowed a Work Opportunity Tax Credit.
Claiming the Credit
In order to claim the new version of the Employee Retention Credit, eligible employers must report their total qualified wages and the related health-insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers. The credit is taken against the employer's share of Social Security tax, but the excess is refundable under normal procedures.
Please email us at Office@CPAsite.com or call this office at 904-396-5400 to determine if your business might benefit from this law change or other employer-beneficial changes to the ERC that are effective for 2021 and aren’t covered in this blog.