The recently enacted Consolidated Appropriations Act (CAA) made many changes and updates to the prior COVID-19 relief legislation. Among those, it provides greater relief to businesses by clarifying and expanding the Employee Retention Credit.
This credit, created by the CARES Act, allows eligible employers a refundable credit against employment taxes equal to 50 percent of qualified wages paid from March 13, 2020 to December 31, 2020 to employees who are not working due to the employer’s full or partial suspension of business or a significant decline in gross receipts.
Before the CAA, this credit did not benefit employers applying for PPP funds, as employers could not both apply for this credit and qualify for PPP funding. However, this new law allows employers who borrowed PPP funds to take advantage of BOTH programs. The credit was also expanded to 2021 for wages paid between January 1, 2021 – July 1, 2021 (see 2021 applicable limits/amounts below in blue).
4 Commonly Asked Questions Regarding the Employee Retention Credit
1. Who is eligible for the ERC?
- An employer whose business was fully or partially suspended during the calendar quarter due to government shutdowns/limits on travel/group meetings, etc. due to COVID-19, OR
- An employer that experienced a 50% decline in gross receipts for a calendar quarter compared to the same quarter in the prior year. (2021: 20% or more reduction in gross receipts when comparing a quarter in 2021 to that same quarter in 2019. Please note that employers not in existence as of the beginning of the same calendar quarter in 2019 may use the same calendar quarter in 2020.)
2. How do I calculate the credit?
- The credit is equal to 50 percent (70% for 2021) of Qualified Wages (see definition below) paid to employees who are not working due to the employer’s full or partial suspension of business or a significant decline in gross receipts.
- The credit is refundable, meaning employers can potentially get a refund if the credit exceeds the employer’s 6.2% of social security tax paid on those wages.
- The credit is a dollar for dollar credit against employment taxes and can reduce the amount of payroll taxes due when filing payroll tax returns.
- The credit can be claimed on a quarterly basis, but the wages, including health benefits, for which the credit can be claimed are limited to $10,000 in aggregate per employee for all quarters. So the maximum qualified wages are $10,000 per year, per employee for 2020 and $10,000 per quarter, per employee for 2021.
3. What amount of wages are eligible for the ERC?
- 100 or more employees: For an employer with over 100 average full-time employees in 2019, the eligible wages for the credit are only those paid to staff who are NOT providing services because operations were suspended or due to the decline in gross receipts to the employer. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship. (2021: For an employer with over 500 average full-time employees in 2019, the eligible wages for the credit are those paid to staff who are NOT providing services to the employer.)
- 100 employees or below: For an employer with 100 or fewer average full-time employees in 2019, all wages paid are eligible for the credit, regardless of whether the employee is providing services because operations were suspended or due to the decline in gross receipts to the employer. (2021: For an employer with 500 or fewer full-time employees in 2019, all wages paid are eligible for the credit, regardless of whether the employee is providing services to the employer.)
- If the credit is based on business disruption, the credit only applies to wages paid during the government ordered suspension (the same rule applies to 2021).
- If the credit is calculated based on a drop in receipts of 50% or more, the credit continues in subsequent quarters until the end of a quarter in which the business gross receipts get back up to at least 80% of the comparative quarter.
- The recent legislation allows an employer to take the Employee Retention Credit on healthcare costs for furloughed employees, even if they are not collecting wages. Would be subject to the limits on wages noted above.
- Wages paid for with forgiven Payroll Protection Program (PPP) proceeds cannot qualify for the credit. Therefore, it is imperative that when completing the application for PPP forgiveness, the allocation of PPP funds to other eligible expense categories first (rent, utilities, mortgage) is crucial to better leverage the allocation of payroll between PPP forgiveness and the Employee Retention Credit.
- Also, wages counted for the ERC cannot be counted for the qualified paid sick and family leave credit nor the work opportunity credit.
4. How do I claim the Employee Retention Credit?
- The credit is claimed in advance on Form 7200, or it can be claimed as a credit on Form 941 (employer’s quarterly payroll tax return), which is due on January 31st. It is unlikely that you can file this form correctly on time, as claiming the credit can be complex. You are eligible to file amended 941-x to claim the credit for any quarter in 2020 that you would have been eligible.
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If you have any further questions or concerns, please reach out to your team at MGA. We will continue to keep you updated with any further guidance as it is released.