The Coronavirus Aid, Relief and Economic Security (CARES) Act signed in March 2020 created a new Employee Retention Credit (ERC) for employers who:
- Had operations partially or fully suspended as a result of orders from a governmental authority due to Covid-19, or
- Experienced a decline in gross receipts by more than 50% in a quarter compared to the same quarter in 2019.
This first edition of the ERC is a 50% tax credit for the first $10,000 of compensation (which includes the employer portion of health benefits) for each eligible employee. The tax credit applies to wages paid from March 13, 2020 through Dec. 31, 2020 resulting in a maximum $5,000 tax credit for the year.
- Eligible employees for employers with more than 100 employees are full-time employees who are being paid, but not providing service due to the aforementioned partial or full shutdown or reduction in gross receipts.
- For employers with 100 or fewer FTEs, all employees, regardless of whether those employees are providing service, count towards eligibility.
The refundable credit is applied against the employer portion of payroll taxes, but employers may not claim the same employee for the ERC and the Work Opportunity Tax Credit for the same period. Also, employers may not claim the same wages for an employee under the ERC and the employer credit for paid COVID-related family-medical leave (FMLA). Finally, employers who received a Paycheck Protection Program (PPP) loan are not eligible for this ERC.
The Consolidated Appropriations Act (CAA) signed in Dec. 2020 increased the ERC’s 50% credit to 70% and expanded the per-employee creditable wage limit from $10,000 per year to $10,000 per quarter for the first two quarters of 2021 (Jan. 1 – June 30, 2021).
- In addition, the CAA expanded employer eligibility by reducing the required year-over-year decline in gross receipts from 50% to 20%.
- The CAA also expands the more favorable FTE eligibility threshold for employers with 100 or fewer FTEs to those with 500 or fewer regardless of whether they’re providing service.
- The CAA permits employers who received PPP loans to qualify for the ERC for wages not paid with forgiven loans retroactive to March 27, 2020.
The American Rescue Plan Act of 2021, signed in March 2021, extends the CAA’s revisions to the ERC for the last two quarters of 2021 (through December 31, 2021) for wages paid after June 30, 2021. Thus, it is possible that an eligible employer could fully utilize the ERC for an eligible employee for the maximum $5,000 credit for 2020 and $28,000 ($7,000 per quarter) for 2021.
IHA members are urged to consult with their accountants and/or tax advisors to see if they are eligible to take advantage of the Employee Retention Credit.