Update: This article was updated on 3/25/2021 to reflect changes brought on by the American Rescue Plan Act of 2021. For more information on the extension, see this article.
The Employee Retention Credit (ERC), introduced in March 2020 as part of the CARES Act, was a much-needed funding source for many employers. However, many were ineligible to claim the credit in 2020 as they opted to receive funding through the Paycheck Protection Program instead.
With the recent enactment of the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021, the rules have changed and the credit has been extended to December 31 ,2021. The ERC is now more favorable than ever and could yield a large refund for your organization.
With the recent law changes, the restriction for PPP loans has been retroactively removed. This means employers can go back and claim the ERC for 2020, even if they received a PPP loan. Employers just need to make sure they aren’t double dipping on the wages. In other words, wages being characterized as qualifying expenses for PPP loan forgiveness can’t also be used for the ERC calculation.
Additionally, there are enhanced benefits for 2021, including:
- an expansion of the credit to $10,000 in quarterly wages (rather than the annual wage limit),
- allowing up to 70% of wages as a credit (previously it was 50%), and
- raising the full-time employee threshold to 500 employees (previously the expanded credit was allowed for employers with 100 or less full-time employees).
If your organization was, or is still, facing the inability to operate at full capacity due to government restrictions, or if it is experiencing a more than 50% (2020) or 20% (2021) decline in gross receipts when compared to that same quarter in 2019, do not ignore the employee retention credit. There is a potential for large tax savings that can provide immediate cash flow to your organization.
Summary of Changes for the ERC
Below is a summary of what has changed under the new Consolidated Appropriations Act for the ERC. For a more detailed analysis of the ERC laws under the CARES Act, especially for employers considering a retroactive claim for 2020, please see our prior article on the topic.
|ERC Calculation for 2020|
|ERC Calculation for 2021
(Consolidated Appropriations Act and American Rescue Plan Act)
|What is the Timeframe?||Qualified wages paid from March 13, 2020 – December 31, 2020.||Qualified wages paid from January 1, 2021 – December 31, 2021.
|What are Qualified Wages?||Includes wages, compensation, and health plan expenses paid by the employer. No double benefit on wages paid – wages used for FMLA and FFCRA credits may not be counted towards the ERC and PPP loan wages forgiven.
|Which Employers are Eligible?||1. Carrying on a trade or business during 2020; and 2. Full or partial suspension due to government order
Significant decline of more than 50% (2020) or 20% (2021) in gross receipts when compared to the same quarter in 2019
|Are Government Employers Eligible?||No. The federal government, governments of any State or political subdivision thereof, and any agency or instrumentality of these government are not eligible for the employee retention credit.||Beginning January 1, 2021, certain government entities are now eligible, including college or universities, hospital or medical care facilities, and certain government corporations, including federal credit unions.
|What is a Full or Partial Suspension?||An employer is required to fully or partially suspend more than a nominal portion of its operations through a government order. This may include a reduction in business hours or the inability to operate certain business activities.
Note, if an employer can continue its operations comparably in a telework manner, this is not considered a full or partial suspension.
|What is a Significant Decline in Gross Receipts?||A decrease of more than 50% for a 2020 quarter when compared to that same quarter in 2019. |
Employer may continue to qualify for the ERC including to the first quarter in 2020 where gross receipts are greater than 80% of that same quarter in 2019.
|A decrease of more than 20% for a 2021 quarter when compared to that same quarter in 2019.
For 2021 only, employers have the option to look at the immediately preceding calendar quarter to determine eligibility for 2021 Q1 and Q2.
|How is the Credit Calculated?||50% of qualified wages paid during the year, up to $10,000 of annual wages per employee.||70% of qualified wages paid during the quarter, up to $10,000 of quarterly wages per employee.
|Impact on Employer Size||Employers with 100 or fewer average monthly full-time employees during 2019 can claim a credit for all qualified wages paid to any employee during the period, subject to $10,000 of maximum wages during the year.|
Employers with more than 100 average monthly full-time employees during 2019 may only claim a credit for employees not providing services during the time period.
|Employers with 500 or fewer average monthly full-time employees during 2019 can claim a credit for all qualified wages paid to any employee during the period, subject to $10,000 of maximum wages/per quarter.
Employers with more than 500 average monthly full-time employees during 2019 may only claim a credit for employees not providing services during the time period.
|Is the Credit Refundable?||Yes! Any excess credit is treated as overpayment that is refundable.||Yes – no changes.
For 2021, employers may now receive an advance payment of the credit, up to certain limits.
|Interaction with PPP Loans||Originally, employers that received a PPP loan could not claim the ERC. With the Consolidated Appropriations Act in December 2020, this limitation is retroactively repealed.
For wages paid starting March 13, 2020, employers with PPP loans are now eligible to claim the credit for 2020 and 2021. The credit may not be claimed for wages paid with PPP loan proceeds.
To demonstrate how beneficial this credit may be, let’s walk through an example:
A school typically has 75 full-time employees. It received a PPP loan in April 2020 and therefore didn’t claim the ERC during 2020. The school was remote for the end of the 2020 school year and started the 2021 school year in hybrid mode. Many of its extracurricular activities are still unable to continue due to COVID restrictions through the end of the school year in June 2021. Each employee is paid at least $10,000 per quarter in 2020 and 2021.
|$10,000 per quarter x 75 employees = $750,000 per quarter
|$750,000 per quarter x 70% credit = $525,000 credit per quarter
Under this example, the school may be eligible for a 2021 credit of $1,050,000.
The school may also retroactively file a refund claim for the credit in 2020 due to the eligibility changes to PPP loan recipients. The retroactive calculation for 2020 is as follows:
|$10,000 for 2020 x 75 employees = $750,000 for all of 2020
|$750,000 x 50% credit = $375,000 credit for 2020
Under this example, the school may receive a 2020 retroactive refund of $375,000 for wages paid.
In the end, the school may be eligible for a total refundable credit of $1,425,000 as a result of the recent changes to the credit calculation.
Given recent law changes, do not ignore the employee retention credit. Many employers that were originally ineligible due to receiving a PPP loan are now able to utilize this credit as well. The ability to retroactively receive a refund for 2020 qualifying wages and expanded credit opportunities in 2021 may give your organization a sizeable refund and immediate cash flow.
If you have additional questions, please contact your advisor at Clark Nuber for up-to-date information on the latest rules surrounding the Employee Retention Credit.
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