The Employee Retention Credit (ERC) was enacted under the CARES Act to provide employers with a refundable payroll tax credit for 50 percent of qualified wages paid to certain employees. The ERC could be claimed with respect to wages paid from March 13, 2020, through December 31, 2020. The maximum amount of qualified wages that could be taken into account per employee was $10,000, resulting in a maximum credit of $5,000 per employee. In general, the ERC was available to employers who experienced a partial or full shutdown of operations due to orders from a governmental authority resulting from COVID-19 or who experienced a greater than 50 percent reduction in quarterly receipts, measured on a year-over-year basis from 2019 to 2020. The CARES Act version of the ERC is further summarized in our alert from March 30, 2020.
The ERC was extended and expanded under the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which is part of the Consolidated Appropriations Act, 2021 that was enacted on December 27, 2020.
The first change to the ERC under the act is that the ERC may now be claimed with respect to qualified wages paid from January 1, 2021, through June 30, 2021.
Next, the ERC percentage was increased from 50 percent to 70 percent. In addition, the wage limit per employee of $10,000 for all quarters during 2020 has been increased to $10,000 per quarter for the first two quarters of 2021. Accordingly, the maximum ERC an eligible employer may claim per employee for 2021 is $14,000 (i.e., 70 percent of $10,000 per quarter for two quarters during 2021).
The act also altered the eligibility requirements for claiming the ERC. Specifically, in order to claim the ERC in 2021, an employer is only required to have experienced a decline of more than 20 percent in quarterly receipts, measured on a year-over-year basis from 2019 to 2021. In addition, employers may elect to compare the prior quarter’s receipts to the applicable quarter in 2019 to determine eligibility. For example, for purposes of claiming the ERC for the first quarter of 2021, an employer may elect to compare receipts from the fourth quarter of 2020 to the same quarter in 2019.
The definition of qualified wages on which the ERC is claimed was also modified for 2021 to make it easier for larger employers to take advantage of the ERC. The CARES Act version of the ERC counted all wages for employers that averaged 100 or fewer full-time employees in 2019. For larger employers, however, the only wages that were counted were wages paid to employees who were not providing services due to the shutdown or decline in business revenue. The act raised the employee threshold so that employers with up to 500 full-time employees may count all wages. The employees of certain affiliated entities are counted for purposes of determining whether the 500-employee threshold is met.
Finally, the act made a few other changes that were made retroactive to the date of the CARES Act version of the ERC, thus creating the opportunity to amend payroll tax returns filed for 2020:
- The act lifted the ban on an employer claiming the ERC if the employer also obtained a loan under the paycheck protection program (PPP). However, an employer may not claim the ERC with respect to wages that were paid with funds forgiven under the PPP.
- Group health care costs count as qualified wages even if no other wages are paid to an employee. This change potentially allows the cost of health care for furloughed employees to be counted for purposes of claiming the ERC.
If you have any questions regarding the content of this alert, please contact Gerry Stack, Tax Practice Area co-chair, at gstack@barclaydamon.com; Nick Scarfone, Tax Practice Area co-chair, at nscarfone@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or another member of the firm’s Tax Practice Area.