The Employee Retention Credit (ERC), created to encourage employers to keep their workforces intact during the COVID-19 pandemic, has been with us for a year. However, questions remain for many employers. With the new American Rescue Plan Act (ARPA) extending the credit and expanding eligibility, employers should brush up on the details. The credit may be worth as much as $28,000 per employee in 2021.
The CARES Act, which was enacted in March 2020, generally made the ERC available
to employers whose:
- Operations were suspended fully or partially due to a COVID-19-related government shutdown order, or
- Gross receipts dropped more than 50 percent compared to the same quarter in the previous year (until gross receipts exceed 80 percent of gross receipts in the earlier quarter)
The credit originally equaled 50 percent of “qualified wages” – including health care benefits – up to $10,000 of qualified wages per eligible employee from March 13, 2020, through December 31, 2020. As a result, the maximum benefit for 2020 was $5,000 per employee.
Under the CARES Act, Paycheck Protection Program (PPP) loan borrowers weren’t allowed to claim the ERC. The Consolidated Appropriations Act (CAA), which was enacted in December 2020, changed that retroactively, so employers that receive PPP loans still qualify for the ERC for qualified wages not paid with forgiven PPP funds.
The CAA also extended the credit for eligible employers that continue to pay wages during COVID-19 closures or recorded reduced revenue through June 30, 2021. That wasn’t the only change the law made to the ERC, though.
The CAA increased the amount of the credit to 70 percent of qualified wages, beginning January 1, 2021, and raised the limit on per-employee qualified wages from $10,000 per year to $10,000 per quarter. In other words, you can obtain a credit as high as $7,000 per quarter per employee.
The CAA also expanded eligibility by reducing the requisite year-over-year gross receipt reduction from 50 percent to 20 percent. It also raised the threshold for determining whether a business is a “large employer” – and therefore subject to a stricter standard when computing the qualified wage base – from 100 to 500 employees.
The ARPA extends the ERC through the end of 2021. It also makes some changes that apply solely to the third and fourth quarters of the year.
The new law expands the pool of employers who can take advantage of the credit by establishing a third path – beyond the suspension of operations or decline in gross receipts – to eligibility. Now, so-called “recovery startup businesses” may also qualify for the ERC.
A recovery startup business generally is an employer that:
- Began operating after February 15, 2020, and,
- Has average annual gross receipts of less than or equal to $1 million.
While these employers can claim the credit without suspended operations or reduced receipts, it is limited to $50,000 total per quarter.
The ARPA also targets extra relief at “severely financially distressed employers,” meaning those with less than 10 percent of gross receipts for 2021 when compared to the same period in 2019. Such employers can count as qualified wages any wages paid to an employee during any calendar quarter – regardless of employer size. Otherwise, the ARPA continues to distinguish between large employers and small employers for purposes of determining qualified wages.
Note the ARPA extends the statute of limitations for the IRS to evaluate ERC claims. The IRS will have five years, as opposed to the typical three years, from the date the original return for the calendar quarter for which the credit is computed is deemed filed.
A Complicated Calculation
The precise amount of your ERC will vary depending on the period, your number of employees, and other factors.
John Schwartze is a tax principal with Brown Smith Wallace, a full-service CPA and business advisory firm in St. Louis, Missouri. He can be reached at email@example.com.