The Employee Retention Credit (ERC) was introduced in March 2020 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The 2021 Consolidated Appropriations Act (CAA) both retroactively modified the original ERC and introduced a new ERC effective January 1, 2021. The CAA changes increase the amount of relief available and the types of businesses eligible for that relief.
While these changes present greater benefits to more employers, it’s important to remember that we still have no formal IRS guidance in this area. Tax planning involving these provisions should be done with caution and in consultation with your tax preparer.
“Old” ERC Under the CARES Act
The CARES Act created the ERC as an incentive for employers to retain their employees during the COVID-19 pandemic. Specifically, employers received a credit against their share of Social Security taxes paid on “qualified wages” provided to retained workers during 2020.
The old ERC was available to employers whose businesses either (i) were fully or partially suspended due to government orders related to COVID-19, or (ii) had significant reductions in gross receipts for the calendar quarter for which the credit was claimed compared to gross receipts for the same calendar quarter in the prior year. The amount of the tax credit provided by the ERC was 50% of wages paid to an employee, plus the cost to continue providing health benefits to the employee, up to an annual cap of $10,000 in qualified wages paid from March 12, 2020, through the end of 2020.
A business that qualified for the old ERC could simply reduce its tax deposits by the amount of the credit. To the extent that does not provide the full relief of the calculated credit, the business was permitted to file a Form 7200 and request a tax refund, or amend its Form 941 by filing a Form 941-X.
“New” ERC Under the CAA
The CAA both retroactively modified the old ERC and introduced a new ERC effective January 1, 2021. These changes increase the amount of relief available and the types of eligible businesses.
Retroactive to March 13, 2020 (the effective date of the old ERC):
- Employers who receive Paycheck Protection Program (PPP) loans may now also qualify for the old ERC, even if the PPP loan was forgiven, as long as those forgiven portions of the PPP loan are not used to qualify for the ERC. This prohibition against double-dipping also applies for the new ERC.
- Group health plan expenses can be considered qualified wages, even when no other wages were paid to the employee. Again, this also applies for the new ERC.
The new ERC applies for wages paid beginning January 1, 2021, and ending June 30, 2021:
- The credit is increased from 50% to 70% of qualified wages.
- The limit on per-employee qualifying wages is increased from $10,000 per year to $10,000 per quarter. Together with the previous bullet, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.
- The eligibility threshold tied to revenue decline is decreased from 50% to 20%, and employers may now calculate that by comparing the quarter affected by the pandemic to the same calendar quarter of 2019.
Interaction with FFCRA
An employer may receive both the tax credits for qualified leave wages under the Families First Coronavirus Response Act (FFCRA) and the ERC, but not for the same wages. The amount of qualified wages for which an eligible employer may claim the ERC does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA. This is because the FFCRA credits are refundable against employment taxes (as is the ERC), and a double benefit is not permitted.
Careful Tax Planning
Overall, the CAA changes to the ERC are significant and generally support more companies obtaining these tax credits. However, there are several unanswered questions regarding these new rules. We recommend careful planning in consultation with your tax preparer to realize and maximize benefits from the ERC.
Employers Next Steps
- If you are a Full-Service or Managed Payroll client and need assistance with reporting from the ADP system, please contact your Client Account Manager.
- If you have any questions regarding this e-Alert email us.
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