A somewhat overlooked provision of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA) (part of the Consolidated Appropriations Act, 2021) enacted December 27, 2020, extended the Employee Retention Credit (ERC) and expanded both its application and impact on employers impacted by COVID-19. This benefit for employers can be up to $5,000 per employee in 2020 and up to $14,000 per employee in 2021 – even if you, the employer, received Paycheck Protection Program (PPP) loans and/or forgiveness.
Originally part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020, the Employee Retention Credit was often not as beneficial as the Paycheck Protection Program loans as the CARES Act made the two provisions mutually exclusive. The benefit of the PPP almost always outweighed the benefits of the ERC for qualified employers. The TCDTRA eliminated the exclusion retroactive to March 27, 2020, so now affected employers can claim the credit for 2020 and 2021 – even if they received PPP funds. The caveat is that the qualified wages for the ERC cannot also be used for PPP or COVID-19 related sick leave credits provided by the Families First Coronavirus Response Act.
- Employers that are fully or partially shut down due to government COVID-19 related orders; or
- For 2020, employers that have a greater than 50% reduction in gross receipts (measured current quarter over prior year same quarter).
- For 2021, employers that have a greater than 20% reduction in gross receipts in quarter one and/or quarter two over same quarter in 2019.
- Up to $10,000 of wages paid to employees during affected period
- In year 2020, for fully or partially shut down – wages paid during period shut down
- In year 2020, for 50% reduction in gross receipts – wages paid during quarters until and including wages paid in a quarter with less than 20% reduction in gross receipts
- In year 2021, each of quarters one and two – wages paid during quarter with 20% reduction in gross receipts over same quarter in 2019
Wages paid for COVID-19 related sick leave or Family and Medical Leave Act (FMLA) are excluded
- Wages paid with PPP funds are excluded
- Includes ratable portion of group health insurance costs
- For employers with over 100 employees – only applies to employees who are paid but not working
- For other employers – applies to all employees paid during the affected period
- For 2021 – the employee threshold is changed from 100 to 500
Amount of Credit
- 50% of qualified wages for 2020 ($5,000 maximum)
- 70% of qualified wages per quarter ending through June 30, 2021 ($7,000 per quarter; $14,000 maximum)
The credit is refundable and is claimed on payroll tax returns (Form 941). Further guidance is forthcoming from the IRS on procedures for claiming refunds and allocation of wages between the PPP funds, the ERC, and other COVID-19 relief provisions.