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The Employee Retention Credit (ERC) was established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which became effective March 13, 2020. The ERC is potentially available to all businesses regardless of size or number of employees. The ERC applies to eligible employers that paid qualified wages to employees during a period in which operations were at least partially suspended as a result of a government order related to the COVID-19 pandemic (or had quarterly gross receipts decline more than 50 percent compared to the same quarter in 2019). Initially, the ERC was equal to 50 percent of qualified wages with a maximum credit of $5,000 per employee during 2020. The ERC was originally unavailable for those who received loans under the Paycheck Protection Program (PPP).
The Consolidated Appropriations Act (CAA), signed into law on Dec. 27, 2020, retroactively granted PPP loan recipients the ability to also claim the Employee Retention Credit. Additionally, in the case of taxpayers who had not already received the PPP forgiveness decision by Dec. 27, 2020, it expands the types of expenses for which taxpayers may receive forgiveness. These changes were made retroactively to the beginning of the respective programs. As such, taxpayers who received a PPP loan could now be eligible to claim the ERC for 2020. The ERC is also available to businesses regardless of whether they received a PPP loan.
The CAA also enhanced and extended the ERC through the end of the second quarter of 2021, increasing the amount of the credit to $7,000 per employee for each quarter in 2021. Further, it reduced the 2021 threshold for the decline in gross receipts to 20 percent from the 2020 threshold of 50 percent.
The chart below lays out the various areas of qualification and the time frames for ERC.
||Up to $5,000 Per Qualified Employee
||Up to $28,000 Per Qualified Employee
|Employee Retention Credit (ERC)
||Original CARES Act for 2020
||CAA/COVID Relief Bill for 2021
||For 2020, an employer may qualify for the credit if they meet one of the following:
- Govt. Mandate – Your offices were closed, or operations partially suspended by a government order; OR
- Gross Receipts – You experienced a 50% or more decline in gross receipts compared to the same quarter in 2019.
|Gross Receipts Test Modifications – For 2021 an employer may qualify for the credit if gross receipts for a quarter are less than 80% of gross receipts compared to the same quarter in 2019. (Govt. order test remains the same).
||50% of qualified wages applicable for the entirety of 2020.
||Eligibility period extended through all quarters of 2021.
||50% of qualified wages applicable for 2020.
||70% of qualified wages applicable for the first 2 quarters of 2021.
|Qualified Wage Limit
||$10,000 per employee for entire 2020.
||$10,000 per quarter, per employee ($40,000 total) for the first 2 quarters of 2021.
|Maximum Potential Credit
Total (2020 and 2021):
$5,000 + $14,000 = $19,000
|$5,000 (50% of $10,000) per employee for entire 2020.
||$28,000 (70% of $40,000) per employee for the first two quarters of 2021.
|Qualified Wages - Definition
Employers with 100 or fewer full-time employees (small employer) – all wages and healthcare costs paid during eligibility period
Employers with more than 100 full-time employees (large employer) – all wages paid to employees who are NOT providing services (full or partial reduction).
|Increases definition of small employer to 500 or fewer employees, allowing wages and healthcare paid to ALL employees to qualify for employers with 500 or fewer employees.
|PPP Loan Impact
||Companies that received a loan under the Paycheck Protection Program (PPP) were unable to claim an employee retention credit, even if such loan was not forgiven.
||Companies are retroactively eligible to claim both an ERC and a PPP loan. However, any wages used for forgiveness of the PPP are ineligible to also be claimed for the ERC.
|Small Employer Max Credit Example
||Eligible small business employer with 100 employees could receive up to $500K credit in 2020
||Eligible small business employer with 500 employees could receive up to $28M credit in 2021