Businesses that suffered significant declines in gross receipts in 2020 or 2021 or that were fully or partially shut down due to COVID-19 restrictions may be eligible for the Employee Retention Credit (ERC). The credit is designed to subsidize eligible employers that retained and paid employees under difficult economic conditions. Eligibility for the ERC is made on a quarterly basis. The credit is claimed against the employer’s portion of Social Security payroll taxes and is refundable. Most employers will claim the credit on Form 941. The maximum credit per employee for 2020 is $5,000, which is based on 50% of $10,000 of qualified wages paid during the period March 13 – December 31, 2020. The maximum credit per employee per quarter for 2021 is $7,000, based on 70% of $10,000 of qualified wages paid in each quarter during the period January 1 – June 30, 2021.
Employers who received PPP loans were previously prohibited from claiming the ERC. However, pursuant to the Consolidated Appropriations Act which was signed into law on December 27, 2020, PPP borrowers are now retroactively deemed eligible for the ERC, as long as the ERC wages were not paid with funds from forgiven PPP loans. An employer that now determines itself to be an “eligible employer” for prior quarters can potentially file amended returns (Form 941-X) or claim a “catch-up” credit on its 2020 4th Quarter Form 941.
“eligible employers” are those who suffered significant declines in gross receipts or whose operations were suspended by governmental order due to COVID-19 during 2020 or 2021.
“refundable” means the employer can get a refund if the amount of the credit (for the quarter) exceeds the amount of the tax.
“significant decline” is a year-over-year comparison of quarterly revenue. A significant decline occurs if the gross receipts for a calendar quarter in 2020 are less than 50% of the gross receipts for that same quarter in 2019. The significant decline begins on the first day of the 2020 quarter in which the significant decline occurs. The significant decline ends on the first day of the quarter following the 2020 quarter in which the 2020 quarter’s gross receipts exceed 80% of the 2019 quarter’s gross receipts. This means that a significant decline may potentially span multiple quarters, not just the initial quarter that had the greater-than-50% decline. If the significant decline is ongoing through the final quarter of 2020, then it ends on the first day of the first calendar quarter of 2021. However, for the first two quarters of 2021, the significant decline threshold is more generous and only requires a greater-than-20% decline, rather than a greater-than-50% decline.
“shutdown” includes the full or partial suspension of operations in any quarter due to governmental orders limiting commerce, travel, or group meetings due to COVID-19.
“qualified wages” include an employer’s qualified health plan expenses. Employers who averaged 100 or fewer full-time employees in 2019 may include qualified wages up to $10,000 paid to any employee during any period in a calendar quarter of economic hardship during 2020. The $10,000 per employee is an annual limitation for 2020 and a quarterly limitation for 2021.
“qualified health plan expenses” include group health plan amounts paid for by both the employer and the employee, but not amounts that the employee paid for with after-tax contributions.
Changes for 2021
The Consolidated Appropriations Act also extended and enhanced the ERC going forward. The credit is now available for the first two calendar quarters of 2021 (through June 30) regardless of whether the credit was already claimed in 2020.
The following thresholds have been adjusted for 2021 only:
- The $10,000 limitation on eligible wages has been changed from annual to quarterly.
- The maximum ERC has been increased from $5,000 to $7,000 per employee per quarter.
- Consequently, the maximum credit per employee for 2021 is ($7,000 x 2 quarters) = $14,000.
- The “significant decline” in gross receipts threshold has been decreased from a greater-than-50% decline to a greater-than-20% decline.
- This will expand ERC eligibility.
- For measuring the decline, the quarter in 2021 will be compared to the same quarter in 2019.
- The employee threshold affecting the calculation of “qualified wages” has been increased from 100 employees to 500 employees.
- Bonuses or pay increases are now allowed in the quarter for which the credit is claimed.
- For 2020, there were some restrictions on pay increases if the employer averaged over 100 employees.
Affinity Group is here to help businesses navigate these unprecedented times. Please don’t hesitate to contact us should you have any questions.