Consolidated Appropriations Act Expands Employee Retention Tax Credit
The Employee Retention Tax Credit (ERC) was originally enacted by the CARES Act (PPP1) and is a refundable tax credit against the employers share of FICA taxes. Employers participating in the PPP loan program were ineligible to qualify for ERC payments. The Consolidated Appropriations Act (PPP2) makes a retroactive change to the ERC that employers who received PPP loans are now eligible for the ERC, so long as the same wages used for the ERC are not used for the PPP loan forgiveness or FMLA credits. The ERC applied to wages paid between March 13, 2020 through December 31, 2020. PPP2 expanded the ERC period to include January 1, 2021 through June 30, 2021 with expanded provisions.
To be eligible for the ERC an employer’s business operations were either:
- Fully or partially suspended by a COVID-19 governmental order and the eligibility period is only when the order was in force.
- Business gross receipts were less than 50% of gross receipts for the same quarter of 2019. The Company remains eligible in 2020 until the end of the calendar quarter in which gross receipts are 80% or more of the same quarter in 2019.
For wages paid in the 2020 eligibility period, the maximum ERC credit per employee is $5,000 or 50% of ERC qualified wages. The credit is annual during the eligible period March 13, 2020 through December 31, 2020. Qualified wages include the cost of employee health benefits and are limited to $10,000 per employee per year. As previously discussed, wages used for PPP loan forgiveness are not ERC qualified wages. There are further limitations for a company with 100 employees or more, and additional considerations for controlled ownership groups.
The revisions of PPP2 to the ERC are retroactive to March 13, 2020. As a result of the revision, PPP borrowers which were previously barred from claiming the credit have an immediate refund opportunity. Employers with qualified wages during an eligible period can amend their form 941 filings for the eligible periods to claim the ERC refunds. We recommend using eligible wages for ERC credit and refunds, before apply eligible wages to PPP forgiveness.
PPP2 expands the ERC into 2021 with further modifications. For the period January 1, 2021 through June 30, 2021:
- PPP2 increases eligibility by reducing the 50% gross receipts test to 20% of gross receipts of 2019 same quarter gross receipts.
- The credit is increased from 50% to 70% of ERC qualified wages which makes the maximum quarterly credit $7,000.
- Each employee ERC qualified wages are increased from $10,000 per year to $10,000 per quarter.
- PPP loan forgiveness wages are not considered ERC qualified wages.