An Overview of Employee Retention Credits
January 12, 2021 by Kelly O'Farrell

Employee Retention Credit and PPP Forgiveness

Below is a summary of key provisions of the credit, comparing the original and the new law. This credit used to be not available if a company took a PPP loan, but that is no longer the case. In other words, you can claim both the ERC and receive a PPP loan as long as you do not use the same wages to qualify for both benefits. The Consolidated Appropriations Act, 2021 also changes the maximum amount of qualified wages per employee to $10,000 per employee per quarter, which previously was $10,000 per employee per calendar year. In our opinion, with both the 2020 and 2021 changes to this credit, it will become a bigger piece of the liquidity solutions for businesses.

  • Employee Retention Credit (ERC) under the CARES Act encourages businesses to keep employees on their payroll.
  • Refundable tax credit related to employee wages paid by an eligible employer whose business has been financially impacted by COVID-19.
  • New provisions for 2021 under the Consolidated Appropriations Act (CAA) passed 12/27/20 allows eligible businesses to utilize both ERC and PPP Forgiveness.

Time Period Credit is Available

CARES ACT
  • Qualified wages paid after March 12, 2020, and before January 1, 2021.
Consolidated Appropriations Act, 2021
  • Qualified wages paid after March 12, 2020 to December 31, 2021

Eligibility Requirements

CARES ACT
  • Businesses with operations that were either fully or partially suspended by a COVID-19 governmental order and only during the period the order is in force; or
  • Gross receipts were less than 50% of gross receipts for the same quarter in 2019 until such quarter as gross receipts are 80% of same quarter in 2019.
  • Businesses that were not in existence in 2019 could use a comparison to 2020 for purposes of the credit.
Consolidated Appropriations Act, 2021
  • Beginning January 1, 2021, the credit will be available to businesses with operations that are either fully or partially suspended by a COVID-19 governmental order and only during the period the order is in force; or
  • Gross receipts are less than 80% of gross receipts for the same quarter in 2019.
  • Businesses that were not in existence in 2019 may use a comparison to 2020 for purposes of the credit.

Percentage of Wages

CARES ACT
  • The credit is 50% of the qualified wages paid to an employee, plus the cost to continue providing health benefits to the employee.
Consolidated Appropriations Act, 2021
  • Beginning January 1, 2021, the credit is 70% of qualified wages, plus the cost to continue providing health benefits to the employee.

Maximum Credit Amount

CARES ACT
  • Annual cap of $5,000 per employee ($10,000 in qualified wages x 50%).
Consolidated Appropriations Act, 2021
  • Beginning January 1, 2021, the cap is increased to $7,000 per employee per quarters of 2021 ($10,000 in qualified wages x 70%)
  • The 2021 credit is available even if the employer received the $5,000 maximum credit for wages paid to such employee in 2020.

How Does It Work?

CARES ACT -2020
  • The credit was 50% of the qualified wages paid (after 03-12-20) to an employee, plus the cost to continue providing health benefits to the employee
  • Eligible quarters must be determined
  • Maximum credit = $5,000 per employee in 2020
Consolidated Appropriations Act, 2021
  • Beginning January 1, 2021, the credit is 70% of qualified wages, plus the cost to continue providing health benefits to the employee
  • Eligible quarters must be determined
  • Maximum credit = $7,000 per employee per quarter in 2021

How To Claim The Credit

CARES ACT -2020
  • Filed through quarterly or annual Form 941/943
  • Could file through Form 7200
  • Likely file a 941X amended return for retroactive refund
Consolidated Appropriations Act, 2021
  • Filed through quarterly or annual Form 941/943
  • Could file through Form 7200

Employer Size

CARES ACT
  • A company with 100 or fewer employees was eligible for the credit, even if the employee was working. Employer size does not matter for eligibility, but does matter for calculation (100 FTE threshold)
Consolidated Appropriations Act, 2021
  • Beginning January 1, 2021, the threshold increases to 500.
  • An employer with 500 or fewer employees will be eligible for the credit, even if employees are working. Employer size does not matter for eligibility, but does matter for calculation (500 FTE threshold)

PPP Loan Interplay

CARES ACT

Prior to December 27, 2020, if a business received a PPP loan, ineligible for ERC.

  • REPEALED – A company that received a Paycheck Protection Program (PPP) loan was ineligible to claim the employee retention credit.
Consolidated Appropriations Act, 2021
  • This change is retroactive to the effective date under the original law for wages paid after March 12, 2020.
  • A company that received or receives a PPP loan is no longer prohibited from claiming the employee retention tax credit.
  • The credit, however, may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven.
    • Maximize 40% non-payroll expenses for PPP Forgiveness
    • Determine wages that can be applied to ERC by quarter
    • Apply remaining wages during covered period that were not used for ERC to PPP Forgiveness

Advance Payments

CARES ACT
  • In 2020, there was no provision to receive the credit before qualified wages were paid.
Consolidated Appropriations Act, 2021
  • The IRS is expected to draft guidance to allow an advance payment of the credit for companies with 500 or fewer employees, based on 70% of average quarterly payroll for the same quarter in 2019.
  • If the amount of the actual credit determined at the end of the quarter is less than the amount of the advance payment, the company will need to repay the excess.

 

What are the next steps?

  • Determine business eligibility for the credit.
  • If ineligible, proceed with applying for PPP Loan Forgiveness
  • If eligible, calculate amount eligible for ERC
  • Allocate remaining eligible payroll expenses to PPP Forgiveness

NOTE: We are still waiting for the IRS to update their FAQs guidance following the passage of the Act enacted on December 27, 2020. IRS Source.

We’re here to assist and guide you!

Give Kelly O’Farrell a call at (320) 214-2959 to discuss your situation.

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