The Employee Retention Credit (ERC) is a long-standing disaster-relief initiative and was re-established with new rules in the CARES Act. Designed to refund quarterly payroll tax credits on qualified wages to businesses, the COVID-19 relief bill passed in December changed and expanded several of the ERC’s eligibility requirements.
Jump to your question:
- Can I claim the ERC if I received Paycheck Protection Program (PPP) funds?
- What are Qualified Wages?
- Who is Eligible to claim a 2020 ERC?
- Who is Eligible for a 2021 ERC?
- What is the maximum credit per employee?
- How is the ERC treated for income tax purposes?
- Is the ERC retroactive?
- What orders count towards being partially or fully suspended?
- Can an essential business be considered as having suspended business operations?
- Are there any other resources to provide some additional guidance?
Can I claim the ERC if I received Paycheck Protection Program (PPP) funds?
Included in the December stimulus package was a retroactive update that allows wages paid after March 12, 2020 to be claimed as part of the ERC.
Businesses looking to maximize these credits—and which have not yet applied for loan forgiveness—may want to consider which wages are included as part of their PPP forgiveness application in order to maximize the credits. Ultimately, each dollar of wages can only be used for one type of government benefit (payroll credits under FFRCA, ETC, FMLA, forgiveness under PPP, income tax credits under WOTC, etc.).
What are Qualified Wages?
Qualified Wages include all employee compensation where a percentage can be claimed as part of the ERC, regardless of whether staff (up to 100 employees in 2020 or 500 in 2021) was working or being paid while not working. Qualified wages include the allocable portion of qualified health plan expenses. Refer to eligibility details for further information about Qualified Wages.
Who is eligible to claim a 2020 ERC?
Employers with fully or partially closed operations due to government mandates, or those who had a 50% decrease in gross receipts, were entitled to claim up to $5,000 per eligible employee (50% of $10,000 qualified wages). Companies with 100 or fewer employees were eligible to receive the full credit, even if staff members were working. Those with more than 100 employees could not receive the credit for wages paid to working employees, even if work is reduced due to slowed business. Only wages paid to employees not working would qualify for these larger companies; the wages would include payment of health insurance for furloughed employees.
Who is eligible for a 2021 ERC?
At the beginning of the year, the employee eligibility threshold increased to 500, and the credit to 70% of qualified wages. Regardless of whether employees are working, all wages paid are now eligible for the credit for employers with fewer than 500 employees. Additionally, the quarterly cap is now $7,000 per employee for the first two quarters of the year, making the total credit possible $14,000 per employee. The decrease in gross receipts is lower, with a quarter becoming eligible if receipts are less than 80% of the comparable 2019 quarter. For employers over 500 employees, the credit is still available for wages, including health insurance, paid to employees not working.
What is the maximum credit per employee?
Extended through the third and fourth quarters for 2021, businesses can maximize the credit at $33,000 per employee. For 2020, employers are eligible to receive $5,000 per employee in each quarter and $7,000 for 2021.
How is the ERC treated for income tax purposes?
For tax purposes, the ERC is considered a decrease in wages and health plan expenses for reporting purposes. This decrease occurs in the same period as the related ERC.
Is the ERC retroactive?
The credit can be used retroactively by amending payroll filings. Businesses with concerns around eligibility should work with their advisor to maximize the credit.
What orders count towards being partially or fully suspended?
Any orders, proclamations, or decrees from the Federal, state, or local government are taken into account. A declaration of a state of emergency does not count unless the declaration includes specific business and travel limits that directly affect the business. Statements from government officials suggesting limits to certain activities generally do not rise to a government order. Any government orders must limit the ability of an organization from transacting business.
Can an essential business be considered as having suspended business operations?
An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows the employer’s operations to remain open. However, an employer that operates an essential business may be considered to have a partial suspension of operations under various circumstances. The Internal Revenue Service FAQs provide clarifications specific to businesses deemed essential under the CARES Act to claim the ERC, indicating, for example, that a healthcare industry essential business may suffer a partial suspension due to applicable local, county, or state governmental orders.
Are there any other resources to provide some additional guidance?
The IRS recently issued Notice 2021-20, which has some more specific definitions and eligibility rules for businesses.
Understanding the ERC with Aldrich
Aldrich is here to help you understand financial relief options available to you and your business. We will guide the next steps to maximize financial, tax, and business decisions. For more resources to help you navigate the developing impact of coronavirus on your business, please continue to monitor our COVID-19 Resource Center and our PPP Resource Center.
Meet the Author
Director of Tax
Sara Northcutt, CPA
Aldrich CPAs + Advisors LLP
Sara Northcutt joined the firm in 2005 and has more than a decade of experience working on a wide range of clients, including financial lending, private equity, real estate, and other closely held businesses. Sara specializes in multi-state tax compliance. Sara received her Bachelor of Arts degree from Vanguard University of Southern California and did her…
- Closely-held businesses
- Certified Public Accountant
- Strategic tax planning and compliance