The Employee Retention Credit (ERC) is for employers impacted by COVID-19 to potentially receive a payroll tax credit. The ERC began under the CARES ACT and was subsequently updated under the TCDTRA (Taxpayer Certainty and Disaster Tax Relief Act, a section of the Consolidated Appropriations Act, 2021). To be eligible, an employer must have fully or partially suspended operations, due to governmental authority orders, during any calendar quarter in 2020. Another way to be an eligible employer is to have experienced a decline in year-over-year gross receipts of at least 20%. Employers can use prior quarter gross receipts to determine eligibility.
Under the CARES Act, taxpayers who received the Paycheck Protection Program (PPP) Loans were unable to claim the ERC. The TCDTRA now allows companies who received or will receive PPP loans to be eligible. However, the credit may not be claimed for wages paid with proceeds of a PPP loan that has been forgiven. A company that received a PPP loan and paid eligible wages in excess of the amount forgiven in 2020 can claim the credit retroactively. The TCDTRA also clarifies that group health plan expenses are considered qualified wages. This is now retroactive to the effective date of the CARES Act as well. Note that eligible employers can include tax-exempt organizations.
The ERC period began March 12, 2020, and is now extended to June 30, 2021, via the TCDTRA. The TCDTRA increased the credit from 50% to 70% of qualified wages in 2021. The wage limit per employee is $10,000 per quarter in 2021. Under the CARES Act, it was a maximum of $10,000 per year. Therefore, for the first two quarters of 2021, the maximum ERC could be $14,000 ($7,000 for each quarter) per employee. The employee wage base can be up to 500 employees, which increased from only 100 under the CARES Act.
The ERC is monetized through payroll tax filings. It can be taken on a quarterly basis, on Form 941. Or, businesses with 500 or fewer employees can advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year. If the amount of the actual credit at the end of the quarter is less than the amount of the advance payment, the company will need to repay the excess. This advance payment is requested on Form 7200, Advance Payment of Employer Credits Due to COVID-19.
If you are eligible, what are the next steps to obtain the credit?
For the 4th quarter of 2020, a company’s payroll tax liability could be eliminated. The deadline to file for 2020 Q4 ERCs is January 31, 2021, which is the original filing deadline for 2020 Q4 941 forms.
Suggestions for companies:
- Document your status as an eligible employer. Maintain support and other ERC supporting documents of the company’s business segments that were either partially or fully suspended due to COVID-19 related government orders.
- Note that impacts from governmental orders can include restrictions to travel, disruptions to the supply chain, and remote employee operational changes. Conduct an analysis of the impacts from COVID-19.
- If applicable, conduct a gross receipts test.
- Perform computations that evaluate the use of PPP funds for the payment of wages. Identify the optimal amount of wages that are eligible for the ERC credit without double counting the PPP loan proceeds that have been forgiven.
Provide support to your payroll services provider in order to make sure the credit is claimed on Form 941, due January 31, 2021.
Lindsey Carman, CPA, is a Staff Accountant at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.