The Employee Retention Credit (ERC) was created in March 2020 as part of the CARES Act to support employers who were looking to retain their full workforces during the pandemic. The American Rescue Plan Act (ARPA), passed a year later in March 2021, extends this credit and expands eligibility making the credit worth up to $28,000 per employee for 2021. Many of the rules around the ERC were originally unclear to employers. Here we take a look at what was initially included in the Employee Retention Credit and the ARPA changes that have since impacted it.
A Brief History of the Employee Retention Credit
The ERC was made available only to certain employers through the CARES Act. Those employers whose business operations were either fully or partially suspended as a direct result of a pandemic-related government shutdown order were eligible to take advantage of this new credit. Additionally, those businesses whose gross receipts dropped more than 50% versus the same quarter in the prior year (until gross receipts exceed 80% of gross receipts in the earlier quarter) were also eligible.
When it launched, the ERC equaled 50% of qualified wages (which included health care benefits) up to $10,000 per eligible employee from March 13, 2020, through December 31, 2020. Given these parameters, the maximum benefit was $5,000 per employee for 2020.
In December 2020, the Consolidated Appropriations Act (CAA) extended the ERC for qualifying employers who continued to pay their employees’ wages during the pandemic or who experienced a reduction in revenue through June 30, 2021. Beginning on January 1, 2021, the credit was increased to 70% of qualified wages through the CAA. It also changed the limit on per-employee qualified wages from $10,000 per year to $10,000 per quarter. Using these revised rules, an employer can secure a credit of up to $7,000 per quarter, per employee.
In addition to these alterations, the CAA also expanded eligibility by reducing the year-over-year gross receipt reduction from 50% to 20%. Simultaneously, it increased the threshold for determining whether a business was considered to be a large employer subject to a stricter standard when computing the qualified wage base — from 100 to 500 employees.
Those employers who took advantage of the popular Paycheck Protection Program (PPP) loans were not permitted to claim the ERC, per rules included in the CARES Act. However, the CAA also contained a provision that employers who received a PPP loan were still able to qualify for the ERC for qualified wages as long as those wages were not paid for with any PPP loan funds that had been forgiven.
Guidance on Partial Suspension of Operations
Prior to the passage of the ARPA, the IRS issued additional guidance on the ERC in early March 2021. In IRS Notice 2021-20, some guidelines for determining whether operations were partially suspended due to a COVID-19-related government order were provided. According to the Notice, businesses satisfy the conditions of having had “more than a nominal portion” of operations suspended if:
- Gross receipts from the suspended operations are 10% or more of total gross receipts;
- Hours of service performed by employees in the suspended operations are 10% or more of total hours of service; or
- Operations modifications result in a reduction of 10% or more of the employer’s ability to provide goods or services.
This guidance is only applicable for the ERC in 2020.
How the ARPA Changes the ERC
The ERC has been extended through the end of 2021 via the enactment of the ARPA. Some additional changes which apply only to the third and fourth quarters of 2021, were also included in the ARPA. For example, the credit will be applied against an employer’s share of Medicare taxes, rather than Social Security taxes, and excess credits continue to be refundable. Other notable changes brought about by the ARPA include:
Recovery Start-up Businesses – The ARPA adds a third group of employers to those who may now qualify and benefit from the ERC – in addition to those employers who had to suspend their operations or who experienced a decline in gross receipts. Recovery start-up businesses, or those which both began operating after February 15, 2020 and had average annual gross receipts of $1 million or less, may also now be eligible to receive the ERC, though there is a $50,000 total per quarter limit.
Qualified Wages –Those employers with less than 10% of gross receipts for 2021 versus the same period in 2019 are also afforded extra relief through the ERC additions made through the ARPA. These employers, regardless of the size of their businesses, can count any wages paid to an employee during any calendar quarter as qualified wages. Otherwise, the ARPA continues to distinguish between large employers and small employers for purposes of determining qualified wages.
For large employers which averaged more than 500 full-time employees during 2019 (or 2020 if the employer didn’t exist in 2019), qualified wages are those paid to an employee who isn’t providing services because of the circumstances that made the employer eligible for the ERC. For smaller employers, qualified wages include wages paid — whether or not the employee was working — during the period of suspended operations or the calendar quarter in which the gross receipts test was satisfied.
For all eligible employers, qualified wages are not permitted to include wages used to compute other credits, loan forgiveness, or certain grants received from the Small Business Administration.
Statute of Limitations – The ARPA extends the statute of limitations to five years (versus the more standard three years) for the IRS to evaluate ERC claims. The IRS will now have five years from the date the original return for the calendar quarter for which the credit is computed is considered filed in which to evaluate ERC claims.
Depending on the period, the number of employees in your organization, and several other factors, the amount of your ERC will vary. To learn more about the ERC or to have your Untracht Early advisor complete the calculation for you, please contact us.