Employers may be eligible for an employee retention credit (“ERC”) for qualified wages paid to employees from March 13, 2020 through December 31, 2021.[1]

Eligibility
Employers may qualify to claim the ERC if they can establish a decline in gross receipts for 2020 greater than 50% compared to a corresponding quarter in 2019 or, for 2021, greater than 20% compared to a corresponding quarter in 2019. Alternatively, employers may qualify for the ERC if operations were fully or partially suspended in order to comply with a government order related to COVID and the suspension had more than a nominal effect on the organization’s operations, as determined by weighing the total facts and circumstances.

New in 2021, recovery startup businesses that began operating after February 15, 2020 with gross receipts over a specified period not exceeding $1 million may be eligible for an ERC of up to $50,000 in each of the third and fourth quarters of 2021.

Also new for 2021, a Severely Financially Distressed Employer, defined as an organization of any size that had less than 10% of gross receipts (or more than 90% reduction in gross receipts) for the same quarter in 2019, is not subject to the large employer limitation on qualified wages described below.

Qualified Wages
Qualified wages for small employers – employers with an average of 100 or fewer full-time employees in 2019 to claim an ERC in 2020 or 500 or fewer full-time employees in 2019 to claim an ERC in 2021 – include all wages paid to or for the benefit of all employees. Qualified wages for large employers only include wages paid to or for employees who did not perform services for the employer (e.g., employees who were furloughed or could not work due to COVID restrictions).

Qualified wages include all remuneration for employment, including the cash value and benefits paid in any medium other than cash. Accordingly, qualified wages include qualified health plan expenses paid by the employer (e.g., group health insurance). An employer may also treat employees’ pre-tax salary reduction contributions to a qualified retirement plan as qualified wages. However, the employer may not treat the amounts it contributes as matching or nonelective contributions to such qualified plans as wages for purposes of the ERC.

Amount of Credit
For 2020, the maximum ERC per employee that may be claimed is $5,000, which is 50% of up to $10,000 of qualified wages paid for all quarters in 2020.

Significantly increasing in 2021, the maximum ERC per employee that may be claimed is $7,000 for each quarter, which is 70% of up to $10,000 of qualified wages paid, totaling $28,000 for the entire  year. This means an eligible employer could potentially receive a maximum ERC of up to $33,000 for each of its employees ($5,000 in 2020 and $28,000 in 2021).

Claiming the ERC
The ERC may be claimed on an employer’s federal employment tax return (typically, Form 941). If the employer has already filed Form 941, it may file an amended Form 941-X to claim the ERC. Employers may choose to reduce their deposits for applicable federal employment taxes in the amount of the anticipated ERC, which provides immediate funding of the credit.[2] Small employers may also be eligible to request an advance payment from the IRS by filing Form 7200, if they do not have sufficient employment taxes to cover the credit. Large employers cannot request an advance payment.

PPP Loans and the ERC
Initially, an organization that received a Paycheck Protection Program (“PPP”) loan was ineligible for the ERC. This prohibition was repealed retroactively, however, and the ERC is now available for wages that were not paid with PPP loan proceeds. In other words, the same wages cannot be used both to qualify for PPP loan forgiveness and to qualify for the ERC.

Miscellaneous
Congress has extended the statute of limitations for the IRS to assess a deficiency for claiming the ERC from three years to five. This may be an indication that the IRS foresees some employers abusing the ERC or applying it incorrectly. As of the publication of this client alert, the IRS has not updated its published guidance to reflect all recent changes in the law. If you are considering claiming the ERC, we encourage you to seek qualified tax or legal counsel to ensure you calculate the credit correctly.

[1] The Coronavirus Aid, Relief, and Economic Security Act allows eligible employers to claim an employee retention credit (“ERC”) for qualified wages paid to employees from March 13, 2020 through December 31, 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 amends and expands the credit from January 1, 2021 through June 30, 2021. The American Rescue Plan Act of 2021 (“ARP Act”) further amends and expands the credit from July 1, 2021 through December 31, 2021.

[2] Under the ARP, for the third and fourth quarters of 2021, the ERC may be claimed only against the employer portion of the Medicare tax, which is 1.45% of wages. For all prior quarters, the ERC may be claimed against the 6.2% employer portion of the Social Security tax.