Employee Retention Credit: It’s Time to Take Another Look!

February 19, 2021

The CARES Act that came into effect in March 2020 contained many relief provisions for both individuals and businesses due to the COVID-19 pandemic. One of the lesser known and utilized relief provisions in that Act is the Employee Retention Credit (ERC).

This one-year credit allowed eligible employers to receive a credit against the employer’s portion of Social Security tax. To be eligible for this credit, an employer had to experience a 1) full or partial suspension of business operations due to a governmental order OR 2) significant decline in operations as evidenced by a reduction of gross receipts for a quarter in 2020 versus the comparable quarter in 2019 of at least 50%. If either of these criteria were met, the employer could claim a credit of eligible wages up to a maximum of $10,000 per employee paid during the periods of impacted operations. For each eligible quarter, the business could receive a credit of up to 50% of qualified wages, up to a maximum of $5,000 per employee, through December 31, 2020. Any amount of the credit that exceeded the employer’s portion of Social Security tax was refundable to the employer. So, why was this credit not utilized by most employers in 2020? Unfortunately, if a business obtained a Paycheck Protection Program loan (PPP), the ERC was not available to that employer.

So, why take another look at this credit now? Another COVID-19 stimulus package was passed in December 2020 that again contained many relief provisions. However, there were several key changes to the original ERC as well as an extension of time to utilize the credit into the first two quarters of 2021. One important change is that having a PPP loan no longer precludes an employer from claiming the ERC if they otherwise qualify. This means that employers that met the eligibility requirements for this credit but were previously precluded from claiming the credit in 2020 because of having obtained a PPP loan can now claim the ERC for qualifying wages paid in 2020. One important caveat is that the qualifying wages used for the PPP forgiveness or the Family Medical Leave Act credit cannot be the same qualifying wages for the ERC…no double dipping.

There were several other favorable changes made to the ERC for wages paid in the first two quarters of 2021, most notably:

A business is considered to have experienced a significant decline in operations if it experienced a reduction of gross receipts in either 1^st or 2^nd quarters (or both) in 2021 of at least 20% as compared to the comparable quarter of 2019. This much lower threshold will allow many more businesses to be eligible for the credit.
The credit in 2021 is now 70% of qualifying wages (up to a maximum of $10,000) for each employee in each of the first two quarters of 2021 (if both quarters meet the qualifying requirements). This is potentially a $14,000 credit per employee for the employer. The original ERC was a maximum of $5,000 per employee for all of 2020.
Again, the employer is not precluded from claiming the ERC if it obtains a first or second draw of a PPP loan in 2021. However, the same wages cannot be considered qualifying wages for both the PPP and the ERC.

As you can imagine there are many details of the ERC that are not specifically discussed here but hopefully, it is clear that all employers should immediately take another look at their potential for claiming this credit that perhaps was previously unavailable in 2020 simply because of receiving a PPP loan. Talk to your tax advisor today!