Employee Retention Credit Extended and Expanded

Updated March 12, 2021

The CARES Act originally created the Employee Retention Tax Credit (ERTC) when it was enacted into law in March 2020. The ERTC is designed to encourage businesses to keep employees on their payroll by providing a refundable tax credit against certain employment taxes equal to 50% of the first $10,000 in qualified wages paid by an eligible employer to an employee in a calendar quarter, with a maximum credit of $5,000 per employee for all of 2020.

Read our blog post from May 11, 2020 on the CARES Act Employee Retention Credit

On December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA) was signed into law by President Trump. The CAA included the Taxpayer Certainty and Disaster Relief Act of 2020 which provided a number of new tax provisions for business and individuals, including the extension of the ERTC to June 30, 2021. The CAA also expanded eligibility provisions for larger employers and increased the amount of the credit from 50% to 70% of the first $10,000 in qualified wages paid to an employee in a calendar quarter, increasing the maximum credit to $7,000 per employee per quarter for each of the first two quarters of 2021. The new legislation also allows employers who received Paycheck Protection Program (PPP) loans in 2020 to claim the ERTC. Prior to the enactment of the CAA, a PPP loan borrower was ineligible to claim the ERTC.

On March 11, 2021, the American Rescue Plan Act of 2021 (ARP) was signed into law by President Biden. The ARP provides new financial and tax relief provisions for businesses and individuals impacted by the COVID-19 pandemic, as well as extensions of existing relief measures, including the ERTC, which is now available to eligible employers through December 31, 2021. In addition, the ARP added new eligibility provisions for Recovery Startup Businesses that began business after February 15, 2020 and it increased the credit amount for Severely Financially Distressed Employers.

Eligible Employers

Eligible Employers for the purposes of the ERTC are employers that were carrying on a trade or business before February 15, 2020, including tax-exempt organizations, that either:

1. Had fully or partially suspended operations during any calendar quarter due to COVID-19 orders from an appropriate governmental authority; or
2. Experienced a significant decline in gross receipts during the calendar quarter.

Self-employed individuals are not eligible for the ERTC with regards to their own earnings; however, a self-employed individual who employs others in its trade or business may qualify for the ERTC with respect to qualifying wages paid to such employees.

Government and state entities and political subdivisions are not eligible for the ERTC in 2020. However, starting January 1, 2021 an exception to this rule is is provided for tax-exempt public colleges, universities and hospitals.

Recovery Startup Businesses that began carrying on a trade or business after February 15, 2020 are now eligible to claim the ERTC even if they do not meet the suspended operations or significant decline in gross receipts tests described above, if their average annual gross receipts over a three-year lookback period do not exceed $1 million. These businesses are now eligible to claim up to $50,000 of ERTC in the third and fourth quarters of 2021 regardless of their number of employees.

Significant Decline in Gross Receipts

Determining a “significant decline in gross receipts” depends on the date in question:

Mar. 13, 2020 – Dec. 31, 2020

Gross receipts in 2020 calendar quarter are less than 50% of gross receipts for the same calendar quarter in 2019 (50% decline)

Jan. 1, 2021 – Dec. 31, 2021

Gross receipts in 2021 calendar quarter are less than 80% of gross receipts for the same calendar quarter in 2019 (20% decline)

For the 2021 ERTC, eligible employers may also elect to use the immediately preceding quarter to determine whether there is a 20% decline in gross receipts. Once an eligible employer’s gross receipts are greater than 80% of the comparable quarter in 2019, they no longer qualify for ERTC after the end of that quarter.

Amount of the Credit

The amount of the ERTC depends on the date in question:

Mar. 13, 2020 – Dec. 31, 2020

50% of qualified wages up to $10,000 paid to employees from Mar. 13 to Dec. 31, 2020 (capped at $5,000 per employee)

Jan. 1, 2021 – Dec. 31, 2021

70% of qualified wages up to $10,000 paid per calendar quarter to employees from Jan. 1 to Dec. 31, 2021 (capped at $7,000 per employee per quarter)

Qualified Wages

Qualified wages are wages (as defined in section 3121(a) of the Internal Revenue Code (IRC) and compensation (as defined in section 3231(e) of the IRC) paid by an eligible employer to some or all of its employees starting March 13, 2020 and ending December 31, 2021. Qualified wages include the eligible employer’s qualified health plan expenses that are properly allocable to the wages.

The definition of “qualified wages” depends, in part, on the average number of full-time employees employed by the eligible employer depending on the date in question:

Mar. 13, 2020 – Dec. 31, 2020

Less than 100 full-time employees: Qualified wages are wages paid to all employees whether or not they are providing services when the business is suspended or there is a significant decline in gross receipts

More than 100 full-time employees: Qualified wages are wages paid to an employee for the time the employee is not providing services when the business is suspended or there is a significant decline in gross receipts

Jan. 1, 2021 – Dec. 31, 2021

Less than 500 full-time employees: Qualified wages are wages paid to all employees whether or not they are providing services when the business is suspended or there is a significant decline in gross receipts

More than 500 full-time employees: Qualified wages are wages paid to an employee for the time the employee is not providing services when the business is suspended or there is a significant decline in gross receipts

The term “full-time employee” means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service, as determined in accordance with section 4980H of the IRC.

Severely Financially Distressed Businesses

A severely distressed business whose gross receipts in the third or fourth quarter calendar quarter of 2021 are less than 10% of gross receipts (90% decline) for the same calendar quarter in 2019 (can also elect to use prior quarter to determine eligibility) can claim the ERTC on all wages paid to employees, even if they are performing services and they employed more than 500 full-time employees in 2019.

Claiming the Credit 

Eligible employers will report their total qualified wages for purposes of the ERTC for each calendar quarter, beginning with the second quarter of 2020, on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return.

The ERTC is allowed against the employer’s share of social security taxes under section 3111(a) of the IRC, and is fully refundable because the eligible employer may get a refund if the amount of the credit is more than certain federal employment taxes owed. In anticipation of receiving the ERTC, eligible employers can fund qualified wages by accessing federal employment taxes, including withheld taxes that are required to be deposited with the IRS, and requesting an advance of the credit from the IRS for the amount of the credit that is not funded by accessing the federal employment tax deposits, by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. 

The IRS has provided guidance indicating that only eligible employers with less than 500 employees, will be able to request an advance payment of the ERTC in 2021 (based on 70% of the average quarterly wages paid by the employer in calendar year 2019).

The amount of qualified wages for which an eligible employer may claim the ERTC does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the Families First Coronavirus Response Act (FFCRA).

Paycheck Protection Program

If an employer received a Paycheck Protection Program (“PPP”) loan, authorized under the CARES Act, the employer was not eligible for the ERTC. The CAA legislation passed by Congress in December strikes this provision retroactively to the date that the CARES Act was enacted (March 27, 2020). PPP borrowers are now eligible for the ERTC in 2020 and for the expanded ERTC in 2021 to the extent that ERTC qualified wages are not paid for with forgiven PPP loan proceeds (no double dipping).

Employers who received a PPP loan in 2020 should review the ERTC eligibility requirements discussed in this Advisory and determine whether their operations were suspended due to a governmental COVID-19 order or they experienced a significant decline in gross receipts in a 2020 calendar quarter compared to the same quarter in 2019, as qualified wages paid to employees, exceeding amounts paid with forgiven PPP loans, may now be eligible for the ERTC.

*****

For additional information on the new stimulus provisions included in the Consolidated Appropriations Act, 2021, as well as other Federal, state and local relief measures, please visit our COVID-19 Resource Center on our website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at covid19team@tsacpa.com