In March 2020, Congress enacted the Employee Retention Credit (ERC) as part of the CARES Act to incentivize companies to keep employees on their payroll. The beneficial ERC is a refundable tax credit claimed against an employer’s share of social security taxes on its quarterly payroll tax filings for each quarter eligible.
When the credit was enacted, however, there was one provision that prohibited many companies from being able to qualify for the credit – those that received Paycheck Protection Program (PPP) loans were ineligible. Many facing mandatory government shutdowns and economic struggles chose to apply for a PPP loan.
Now, as a result of the recently passed Consolidated Appropriations Act, 2021 (CAA, 2021), the PPP loan restriction was removed. Companies that received PPP loans are now also eligible to claim the ERC. This change was made retroactive to the enactment date of the CARES Act in March 2020. Companies that are beneficiaries of this change may see a significant impact.
How Companies Can Qualify for 2020
For a company to qualify for the ERC in 2020, it must still meet one of the following criteria:
- Operations were fully or partially suspended during any calendar quarter in 2020 due to a government order; or
- Experienced a decline in gross receipts of more than 50% for any calendar quarter in 2020 compared to the same calendar quarter in 2019.
If an eligible company meets one of the two qualifications mentioned above, it must then determine if it paid qualified wages. Qualified wages include wages and health plan expenses paid to all employees, whether they provided services or not during their qualified calendar quarter unless the employer is a large employer.
The large employer exception for 2020 states:
- For employers with 100 or fewer full-time employees, qualified wages include wages and health plan expenses paid to all employees, whether they provided services or not.
- For employers with more than 100 full-time employees, qualified wages only include wages and health plan expenses paid to employees who were not providing services.
For example, if employees were furloughed for two weeks, but the company continued to pay those individuals’ wages or health plan expenses during those two weeks, then those expenses would be considered qualified wages for the ERC if you were above the 100-employee threshold.
ERC Interaction with PPP Loan and WOTC
For companies that received a PPP loan, it is important to note that wages paid with forgiven PPP loan funds cannot be used in the calculation of the ERC. This prevents companies from “double-dipping” on the same wages for both the PPP loan program and the ERC. Therefore, companies that received a PPP loan must review their 2020 payroll costs to determine if there are wages remaining – not paid with PPP loan funds – that can be used to claim the ERC retroactively. The same will hold true for 2021 if they are considering both the ERC and a second PPP loan. It may be a strategic decision as to what to submit for forgiveness expenses – payroll only vs. payroll at 60% + eligible non-payroll expenses.
Another interaction to consider is the ERC and the Work Opportunity Tax Credit (WOTC). Many companies calculate and claim the WOTC on their federal income tax returns when they hire individuals from certain target groups. For 2020 and 2021, those companies will need to ensure that they are calculating the credits correctly, as again, there can be no “double-dipping.” The same wages cannot be used for both credits. To reiterate, owners should strategically review this, as the ERC credit is refundable now against payroll taxes while the WOTC is a non-refundable income tax credit against federal income taxes.
2021 ERC Extension and Enhancements
With the recent enactment of the CAA, 2021 the ERC was significantly expanded. Below is a summary of those changes for 2021.
- Extended until June 30, 2021.
- Decline in gross receipts test to qualify for the credit was reduced from 50% to 20%. That means for Q1 2021 and Q2 2021, companies that experience a decline in gross receipts of more than 20% compared to the same quarter in 2019 will be eligible.
- Increase from 100 to 500 in the number of full-time employees that it takes to be considered a large employer.
- The maximum credit that an employer can claim per employee will be $7,000 per quarter versus the previous amount of $5,000 for the entire year.
Note, the ERC’s aggregation rules must, again, be considered for determining when an employer’s business is fully or partially suspended due to a government order and for determining when an employer is considered to have a significant decline in receipts.
Food for Thought
In 2020, many companies did not consider the ERC because PPP loan recipients were ineligible for it. Now, with the change in eligibility requirements, the ERC may provide companies with an opportunity to conserve cash and help keep their businesses running. To claim the ERC retroactively for 2020, the CAA, 2021 provides that an employer may elect to treat Q1 through Q3 2020 qualified wages as being paid in Q4 2020. For 2021, the updated law allows small employers to file for an advance payment of the ERC up to a certain amount. We are currently awaiting more guidance from the IRS on these filing procedures. Contact your GBQ advisor for more information on the ERC and how to claim this valuable payroll tax credit.
Article written by:
Sara Goldhardt, CPA
Director, State & Local Tax Services