The Employee Retention Credit (ERC) was created by the CARES Act on March 27, 2020 to encourage businesses to keep employees on their payroll and continue providing health care benefits during the coronavirus pandemic. The ERC is a refundable payroll tax credit for wages and health care costs paid by an employer whose operations were fully or partially suspended due to a COVID-19 related governmental order or experienced a significant reduction in gross receipts.
On December 27, 2020 the Consolidated Appropriations Act of 2021 (the Act) was signed into law and further enhanced the ERC to provide additional assistance to employers for 2020 and 2021. Employers who were previously ineligible for the credit due to receiving Paycheck Protection Program (PPP) loans are now eligible, as long as the same wages were not utilized in computing forgiveness of the PPP loan. In addition, the Act expanded the criteria for more businesses to be eligible for the ERC in 2021.
| Tax Year 2020 | Tax Year 2021 | |
| Dates Eligible | 3/12/20 -12/31/20 | 1/1/21-6/30/21 |
| Credit Threshold | 50% of qualified wages up to $10,000 per YEAR | 70% of qualified wages up to $10,000 per QUARTER |
| Maximum Credit | $5,000 per employee per year | $7,000 per employee per quarter |
| Eligible Employers | Carries on a trade or business including tax-exempt organizations | Carries on a trade or business including tax-exempt organizations |
| Conditions | 1) Business fully or partially suspended by government order due to COVID-19 OR | 1) Business fully or partially suspended by government order due to COVID-19 OR |
| 2) Significant decline (greater than 50%) in gross receipts per quarter compared to the same quarter in 2019 | 2) Significant decline (greater than 20%) in gross receipts per quarter compared to the same quarter in 2019 | |
|
Qualified Wages
|
100
or fewer FTE employees: – All wages and health care costs paid for employees |
500 or fewer FTE employees: – All wages and health care costs paid for employees |
|
More than 100 FTE Employees: |
More than 500 FTE Employees: |
|
| How to Request the Credit |
Amended Form 941-X (Q1-Q3) Form 941 (Q4) Form 7200 - Advance Payment |
Quarterly Form 941 Form 7200 - Advance Payment |
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Highlights
- The conditions for a business to be partially suspended vary and depend on the facts and circumstances. Your business may be considered impacted by COVID-19 due to governmental orders if the orders limit hours, capacity, travel, suppliers or group meetings.
- A Full Time Equivalent (FTE) is 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 in the month. An employer that operated its business for the entire 2019 calendar year determines the number of its FTEs by taking the sum of the number of FTEs in each calendar month in 2019 and dividing that number by 12. Certain employers are aggregated and treated as a single employer.
- Wages paid to certain related individuals are excluded from the credit.
- The refundable tax credit is reported on the quarterly federal Form 941. Alternatively, an employer may request an advance of the credit on Form 7200 in order to access their refund sooner.
Businesses that are now eligible for credits on 2020 wages can file amended payroll tax forms to request the credit for wages paid in the first three quarters of 2020. Legislation has suggested that the wage credits for prior quarters can be included on the fourth quarter Form 941, due January 31, 2021; however, more guidance is needed.
The Act may provide significant opportunities for your company. However, the interplay between the ERC and PPP is complex, so contact your ORBA advisor to discuss your specific situation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
