Employee Retention Tax Credit Update
By Will Morgan
The Employee Retention Tax Credit (ERC) is designed to help businesses affected by the Coronavirus Pandemic and provides a refundable payroll tax credit to companies that meet the various criteria. This program is being prolonged and expanded under the recently-passed new stimulus bill. Our team has put together a summary of the details of this program below:
April 2020 Stimulus and Assistance
- Employers whose business was (a) fully or partially suspended due to COVID-19, or (b) whose gross receipts for a calendar quarter beginning after December 31, 2019, are less than 50% of its gross receipts in the same calendar quarter for the prior year, are eligible for a credit against employment taxes up to 50% of wages paid to its employees between March 12, 2020, and Dec. 31, 2020. This amount is not to exceed $10,000 with respect to any employee for all calendar quarters (only within the qualified quarter and maximum $5,000 credit per employee).
- Employers with greater than 100 full-time employees are eligible for the credit for wages paid to employees who are not providing services due to suspension or slowdown of business. Employers with less than 100 full-time employees are eligible for the credit for wages paid to employees during such times and are not limited to wages paid to those employees who are not performing services. Wages may also include qualified health plan expenses, which are those amounts paid or incurred by an employer to provide and maintain a group health plan.
Changes Under New Stimulus Plan (enacted 12/27/20)
- 207 extends the timeframe for eligible wages to be paid to July 1, 2021.
- The credit rate is increased from 50% to 70% of qualified wages. Wages are capped at $10,000 per quarter per employee (maximum credit of $14,000 per employee for Q1 and Q2 combined).
- Eligibility for the credit is expanded by reducing the required decrease in gross receipts from 50% to 20% and allowing employers to use the prior quarter’s gross receipts instead of the current quarter’s gross receipts to determine eligibility.
- The limit of creditable wages per employee is increased from $10,000 per year to $10,000 per quarter.
- The applicable number of employees has been increased from 100 to 500 This will permit employers who had 500 or fewer full-time employees in 2019 to take the credit for wages paid to employees who continue to perform services, provided they meet the other requirements.
- The limitation that employers can only count wages up to the amount that an employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship has been removed, allowing employers to claim the credit for bonus pay to essential workers.
- With certain limitations, businesses with 500 or fewer employees in 2019 are permitted to take an advance of the credit.
- Employers who receive or received a PPP loan now will qualify for the credit with respect to wages that are not paid for with forgiven PPP loan proceeds. Starting in Q1 2021, employers can still take out PPP loans and use ERC for Q1 and Q2 2021.
- Quarterly gross receipts have to drop by more than 50% compared to the same quarter in 2019. Employers are then eligible to claim the credit until the subsequent quarter’s gross receipts climb back to at least 80% of the same quarter in 2019.
- Beginning with the first quarter in 2021, the rules have loosened up for employers.
- Quarterly gross receipts for Q1 and Q2 of 2021 are compared to the same quarters in 2019. An employer is eligible if gross receipts dropped by at least 20% in the quarter. They can also meet the test by looking at the immediately preceding calendar quarter and comparing that quarter to the corresponding quarter in 2019.
- Wages paid with forgiven PPP debt are not included in payroll costs taken into account in computing the credit.
The newly expanded and enhanced program is an opportunity to regain valuable tax dollars. Keep in mind that with any new tax legislation, the ERC may be subject to other legislative changes. For more information on the contents of this article, you may visit the IRS site or contact us at (firstname.lastname@example.org). Count on us to bring you need-to-know information and to help you make the most of the new programs within the stimulus bill.