CARES Act
As part of the CARES Act passed in March of 2020, Congress created two mutually exclusive incentives that would provide funds to business owners designed to allow them to keep employees on staff throughout the pandemic:
- Paycheck Protection Program (PPP)
- Employee Retention Credit (ERC)
The ERC is a refundable payroll tax credit that was only available to taxpayers who EITHER:
a) had their business fully or partially suspended during at least one quarter in 2020 by government order, or
b) experienced at least a 50% drop in gross receipts for quarters in 2020 relative to the same quarters in 2019.
Once a business had a quarter in which either (a) or (b) above occurred, they could claim a maximum credit of $5,000 total per employee who was paid “qualified wages” from March 12, 2020 through December 31, 2020.
Eligibility under (a) – Qualified wages includes only wages paid to employees during the period of shut-down.
Eligibility under (b) – Qualified wages includes all wages paid to employees during the eligible quarter.
Under the original CARES Act, if a business took advantage of the PPP, then they were prohibited from taking advantage of the second incentive, the Employee Retention Credit (ERC), and vice versa.
Consolidated Appropriations Act, 2021
- Changed who may claim the ERC by allowing businesses to retroactively or currently both borrow a PPP loan and claim an Employee Retention Credit
- Extended the expiration date of the ERC from 12/31/20 to 6/30/21
- New eligibility thresholds for 2021
- New qualified wage caps for 2021
- New credit % for 2021
- New full-time equivalent employee threshold for 2021
Comparison: 2020 vs 2021
The computation of the ERC depends on what time period you are claiming the credit for:
- 2020: For 3/12/20-12/31/20 the computation remains unchanged from the CARES Act
- 2021: For the extension period, 1/1/21-6/30/21, the computation is new
Allows an employer to claim a credit of:
- 2020: 50% of qualified wages
- 2021: 70% of qualified wages
Eligibility begins in the quarter when a business has either:
- 2020: a) Operations fully or partially suspended by government order, or b) Gross receipts dropped at least 50% compared to the same quarter in 2019
- 2021: a) Operations fully or partially suspended by government order, or b) Gross receipts in a quarter in 2021, or the preceding quarter, dropped at least 20% compared to the same quarter in 2019
Eligibility under (b) continues until the END of the first subsequent quarter in which:
- 2020: Gross receipts exceeded 80% compared to the same quarter in 2019
- 2021: (Same) Gross receipts exceeded 80% compared to the same quarter in 2019
Qualified wages only includes wages paid to employees to not provide services during an eligible quarter if:
- 2020: The business had more than 100 full-time equivalent employees in 2019
- 2021: The business had more than 500 full-time equivalent employees in 2019
Qualified wages includes ALL wages paid to employees (whether they worked or not) during an eligible quarter if:
- The business had less than 100 full-time equivalent employees in 2019
- The business had less than 500 full-time equivalent employees in 2019
Is it ok if the employee is paid more in the quarter of the credit, than they were paid in 30-day period preceding the quarter of the credit? (examples: a bonus or pay increase):
- 2020: No
- 2021: Yes
Can the credit be received in advance?
- 2020: Yes, File Form 7200
- 2021: Yes, File Form 7200
Thus, in 2020, if A were paid $10,000 in Q3 and $10,000 in Q4, the resulting credit would be $5,000 (capped at 50% of $10,000 in wages TOTAL for all quarters). In 2021, however, if A were paid $10,000 in Q1 and $10,000 in Q2, the resulting credit would be $14,000, 70% of $10,000 wages for EACH QUARTER). The enhancements to the ERC for 2021 significantly increase the value of this credit.
To claim the ERC for the 4th Quarter of 2020 and for 2021, you can retain 941 federal employment taxes that would otherwise be due for those quarters (up to the amount of the ERC). Report the ERC and the amount of 941 taxes retained on the Form 941 for the quarter. If the ERC exceeds the 941 taxes for the quarter, your Form 941 will reflect an “overpayment” for which you can request a refund or apply to the next quarter.
To claim the retroactive credit for March 12th-September 30th, 2020, the process is yet unclear. Possibilities include filing amended Forms 941X for 2nd and 3rd Quarters of 2020 or allowing an elective alternative to report a catch-up credit in 4th Quarter of 2020 or a later quarter.
This adds an extra layer of complexity and careful tracking, but you can receive an advance of the ERC to fund the payment of qualified wages by filing IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19. If you file a Form 7200, you will need to reconcile this advance credit and its deposits with the qualified wages on Form 941, Employer’s Quarterly Federal Tax Return.
Important reminders:
- Borrowers of a PPP loan –either an original loan or a second round of PPP borrowing – are eligible to claim an ERC credit.
- All of you who borrowed a PPP loan can now go back and claim the ERC for 2020 if you met either of the tests. It can be claimed retroactively.
- The ERC computation is more generous for 2021 than it is in 2020. (Smaller decrease in gross receipts required, credit is a larger % of qualified wages, and the wage cap for each employee is applied each quarter, instead of in total.)
Warnings:
- No double dipping: careful consideration is necessary to ensure that wages are not duplicated – i.e., both eligible for the ERC and forgiven as part of the PPP process – and that the tax benefits from both programs are maximized.
- Don’t short-change yourself: if you also have FFCRA credits for Sick and Family leave on Form 941 or if you defer the employer’s share of SS tax, you must subtract those credits and deferral first, before determining how much 941 tax is available for the ERC.