Enhancements to the Employee Retention Credit

Monday, December 21st, 2020, Congress passed the Consolidated Appropriations Act of 2021 (the Act) which included several enhancements to the Employee Retention Credit (ERC). The most prominent change is that businesses that received a loan pursuant to the Paycheck Protection Program (PPP) are now eligible for the ERC.

The ERC is designed to encourage businesses to retain their full-time employees through the pandemic and is a fully refundable tax credit for companies experiencing severe business disruptions due to COVID-19. The ERC can result in a substantial financial benefit for organizations. Initially set to expire on December 31st, the ERC is now available for wages paid through July 1, 2021. Under the new legislation, ERC has been expanded and modified for calendar quarters beginning after December 31, 2020. Employers can receive up to $7,000 per full-time employee (FTE) per quarter in ERC – an increase from $5,000 per employee for all of 2020. Companies should claim ERC on their quarterly Form 941, Employer’s Quarterly Federal Tax Return.

Who is an Eligible Employer

The first step in determining whether your company can take advantage of the ERC is to ascertain whether your company is an “Eligible Employer” as defined by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In order to meet the definition of Eligible Employer, your company must have experienced one of the following:

• Business was either fully or partially suspended due to orders from the federal government, or a state government having jurisdiction over the employer, limiting commerce, travel, or group meetings due to COVID-19; or,
• Business experienced significant decline in gross receipts – Under the new legislation, which is effective for calendar quarters beginning after December 31, 2020, a significant decline occurs when an employer’s gross receipts decline by 20% of what they were for the same calendar quarter in 2019 (changed from 50%).

While a company may not have been required to close due to direct orders, a company could be deemed as “partially suspended” when they may not be operating at “normal capacity” due to imposed restrictions from a government authority that limits commerce, travel, or group meetings.

Additionally, a government order imposed on a member of your company’s supply chain could have resulted in your company not operating at normal capacity if the business became unable to acquire needed materials and supplies required to provide full service to customers. Thus, a company may be an Eligible Employer for purposes of the ERC from both direct and indirect causes.

Calculating the Credit Based on Qualifying Wages

Once it is determined that your company meets the Eligible Employer definition, the next step in the analysis is to determine the “Qualified Wages” that your company paid. The Qualified Wages form the basis of the ERC amount a company can claim. Under the new legislation, which is effective for calendar quarters beginning after December 31, 2020, the determination of Qualified Wages is different depending upon whether your company has 500 employees or more (increased from 100 employees).

• More than 500 employees – If your company has more than 500 employees, the credit is available only for compensation paid to employees who are not working as a result of one of the two situations listed above.
• Fewer than 500 employees – If your company has 500 or fewer employees, any compensation paid during the period when the operations were affected by one of the two scenarios above is eligible for the credit, whether the employees were working or not. Some analysis must be done to properly determine the number of employees a company employs for purposes of the 500 employee threshold.

Regarding timing, Qualified Wages are compensation provided to an employee after March 12, 2020 and before July 1, 2021 (extended from January 1, 2021), and may also include the Eligible Employer’s qualified health plan expenses that are allocable to the wages.

A company may not double benefit from claimed credits based on the same wages for purposes of the ERC, the PPP forgiveness determination and other wage-based tax credits. Wages used in calculating paid sick and family leave credits under the Families First Coronavirus Response Act (FFCRA) may not also be considered Qualified Wages for purposes of the ERC. In addition, employers may not use the same wages for a Work Opportunity Tax Credit (WOTC) calculation and in determining the amount of an ERC.

As previously stated, Eligible Employers can claim an ERC for 70%, for calendar quarters beginning after December 31, 2020, (increased from 50%) of Qualified Wages paid to employees after March 12, 2020 and before July 1, 2021. The maximum amount of wages which can be considered for the ERC is $10,000 per employee per quarter. Employers can claim a maximum ERC of $7,000 per employee per quarter through the second quarter of 2021.

How to Claim the ERC

An Eligible Employer claims the ERC is by reducing a quarter’s required payroll tax deposits on its Form 941. Initially, the ERC is applied against the 6.2% employer’s share of social security taxes due on all wages paid to all employees for the quarter. If an ERC is more than that amount, the ERC may offset against the rest of the payroll tax liabilities on Form 941 for the quarter.

If the ERC exceeds all payroll tax liabilities, the company may receive a refund. If a company determines that it was an Eligible Employer for a previous quarter, and has already filed its Form 941 for that quarter without claiming an ERC, the company may file a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the quarter in question to claim the credit.

Next Steps 

If you are a business owner and think you qualify for the ERC, connect with an Aprio Tax Advisor to help calculate and maximize your potential benefit. Aprio’s experts have vast experience with calculating and claiming payroll tax credits and have been on the forefront of helping clients navigate the adverse financial impacts of the Coronavirus pandemic.