The Employee Retention Credit (ERC) is a refundable tax credit against certain payroll taxes that was initially established under the CARES Act to help businesses with the cost of maintaining employment during the pandemic. The ERC is available to companies whose operations were subject to a full or partial suspension due to a government order, or who experienced a significant decline in gross receipts during the pandemic. The size of the credit is determined based on a percentage of “qualified wages,” including allocable qualified health plan expenses that a eligible employer pays to employees.
The ERC is accessible to businesses or trades whose operations were entirely or partially shut down due to a government-issued order, or who saw a significant decrease in overall revenue during the pandemic. The qualification rules for calendar years 2020 and 2021 differ, as elaborated on in more detail below.
Yes. For the purposes of the ERC, a non-governmental tax-exempt organization described in section 501(c) of the Internal Revenue Code that is exempt from tax under section 501(a) of the Code is considered to be participating in a “trade or business” with regards to all operations of the organization.
Yes. Originally, employers were only able to choose between taking a Paycheck Protection Program (PPP) loan or applying for the ERC. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 lifted this restriction, and eligible employers can claim the ERC even if the employer has received one or more PPP loans. Although, an eligible employer cannot claim the ERC on any qualified wages that were used to obtain PPP loan forgiveness (i.e., no double dipping).
For calendar year 2020, employers are eligible to claim the ERC if, during the calendar year, they operated a trade or business and experienced either:
1. A full or partial suspension of the operation of their trade or business during any calendar quarter due to a governmental order limiting commerce, travel or group meetings because of COVID-19; or
2. A significant decline in gross receipts by more than 50% when compared to the same quarter in the prior year (starting with the calendar quarter beginning January 1, 2020).
The amount of qualified wages taken into account for each employee across all calendar quarters cannot exceed $10,000, so that the maximum credit an eligible employer can receive for qualified wages paid to any one employee is $5,000 (50% of $10,000).
For an employer that averaged more than 100 full-time employees in 2019 (a large eligible employer), qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts. For an employer that averaged 100 or fewer full-time employees in 2019 (a small eligible employer), qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.
For calendar year 2021, eligible employers can claim a credit against 70% of qualified wages they pay to employees after December 31, 2020 and before October 1, 2021, up to a maximum $10,000 limit per employee, per calendar quarter in 2021 (resulting in a maximum credit of $7,000 per quarter per employee – a total of $21,000 for 2021).
Effective January 1, 2021, employers are eligible to claim the ERC if they operated a trade or business during 2021, and experienced either:
1. A full or partial suspension of the operation of their trade or business during a calendar quarter on account of a governmental order limiting commerce, travel or group meetings due to COVID-19; or
2. A decline in gross receipts in the first, second or third calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019.3
To establish eligibility based on a decline in gross receipts, employers are allowed to elect using an alternative quarter for calculation purposes.4 With this election, an employer can determine if the decline in gross receipts for a given calendar quarter in 2021 meets the requirements by comparing its gross receipts for the immediate preceding calendar quarter with the corresponding calendar quarter in 2019. For example:
- For the first calendar quarter of 2021, an employer may elect to use its gross receipts for the fourth calendar quarter of 2020 compared to those for the fourth calendar quarter of 2019; and
- For the second calendar quarter of 2021, an employer may elect to use its gross receipts for the first calendar quarter of 2021 compared to those for the first calendar quarter of 2019.
As of January 1st, 2021, in order to qualify for the ERC through wage payments made in 2021, a large eligible employer is now defined as an employer that averaged over 500 full-time employees in 2019, as opposed to the previous definition of 100 full-time employees.
Although the ERC is not included as part of gross income for federal income tax purposes, it will reduce the amount of eligible expenses that an employer can claim as a deduction on their federal income tax return. In other words, no deduction can be made for the portion of wages paid that equals the sum of credits determined for the applicable taxable year.
Yes. There is still time to claim the ERC retroactively by filing a Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund).
The statute of limitations for filing amended quarterly returns is generally three years from the date of filing the Form 941. For example, the amended return for the Employee Retention Credit for the second quarter of 2020 needs to be submitted by July 2023.