What is the Employee Retention Credit?

/ Freidel & Associates, LLC/

2020 Credit Rules

The Coronavirus Aid, Relief and Economic Security (CARES) Act signed in March 2020 created a new Employee Retention Credit (ERC) for employers who had:

  • Full or Partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or

  • A significant decline in gross receipts within the 2020 tax year, of which an employer’s gross receipts are less than 50% of its gross receipts for the same quarter in 2019.

The first edition of the ERC is a refundable tax credit against certain employment taxes equal to 50% of the first $10,000 of qualified wages for each eligible employee. The tax credit applies from March 13th, 2020, through to December 31st, 2020, with a maximum $5,000 tax credit for the year per eligible employee.

The definition of qualified wages will depend upon the number employees held by an employer.

  • If the employer averaged more than 100 full-time employees during 2019, only wages paid to an employee during the eligible quarter to not provide services will be counted towards the credit. Furthermore, the employer can only count wages that the employee would have earned of equivalent duration immediately preceding the period of economic hardship.

  • If the employer averaged 100 or fewer full-time employees during 2019, all wages paid to an employee during the eligible quarter will provide a credit regardless if the employee was working at the time.

Special Notice: Allocable health care costs are eligible for the credit even if no wages are paid to the employee; via the employee is on furlough.

2021 Credit Rules

The second edition of the ERC is a refundable tax credit against the employer’s share of Social Security taxes equal to 70% of the first $10,000 of qualified wages for each employee, per quarter. The tax credit applies from January 1st, 2021, through to December 31st, 2021, which allows for a maximum tax credit of $28,000 per eligible employee.

Furthermore, the second edition of the ERC has relaxed eligibility requirements:

  • A significant decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same quarter in 2019.

    • An alternative calculation method is possible to compute the decline for a given quarter based on the prior quarter. For example, a business could elect to compare Q4 2020 gross receipts with Q4 2019 for the first quarter of 2021 calculation.

  • For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees not providing services because operations were fully or partially suspended or due to the decline in gross receipts.

  • For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or partially suspended or due to the decline in gross receipts.

A few key nuances:

An employer must be careful to not “double dip” the ERC with the Paycheck Protection Loan by claiming the same payroll costs. Instead, payroll costs will prioritize the ERC instead of the PPP loan, but employers can elect to exclude certain costs from the ERC to preserve the PPP loan’s forgiveness status.

It should also be noted that certain owners and persons related to ownership may not be considered eligible employees. Generally, owners of greater than 50% of the business and certain persons related to them are not considered eligible employees.

Certain related employers must generally be aggregated for purposes of the ERC, including the gross receipts calculations. If you have businesses that have any common ownership or other relationship, the affiliation rules need to be considered carefully.

The ERC rules are extremely complex and have special considerations for everything from measuring gross receipts, defining “full-time” employees, affiliation tests, etc. Consult your advisors for more information on how this credit could apply to your business.