Overview

The Employee Retention Credit (ERC) was first signed into law as part of the CARES Act. The CARES Act applies to wages paid between March 13, 2020 and December 31, 2020. The IRS has provided guidance specific to this period via Notice 2021-20.

It was further clarified and expanded as part of the Consolidated Appropriations Act, 2021 (CAA). The CAA applies to wages paid between January 1, 2021 and June 30, 2021. The IRS has provided guidance specific to this period via Notice 2021-23.

It was then clarified and expanded again by the American Rescue Plan Act of 2021 (ARPA). The ARPA applies to wages paid between July 1, 2021 and December 31, 2021. The IRS later provided guidance via Notice 2021-49. The credit was later terminated for the 4th quarter of 2021 for most employers as detailed in Notice 2021-65. It was however, clarified and expanded for Recovery Startup Businesses, who are eligible to take the credit for the 3rd and 4th quarters of 2021 with an overall cap of $50,000 per quarter.

The expansion as a result of the Consolidated Appropriations Act, 2021 permits businesses that received Paycheck Protection Program (PPP) loans to also receive the Employee Retention Credit, which applies retroactively to March 13, 2020. However, the same expenses used for Paycheck Protection Program loan forgiveness cannot be used for purposes of claiming the Employee Retention Credit.

Coordinating benefits with respect to PPP, ERC, and other government programs can be complex as guidance and benefits have been continually changing and evolving. As a result, understanding how the various benefits interact with one another is critical.

How much is the credit?

Put simply, as much as $26,000 per employee.

The Employee Retention Credit is an employer tax credit of up to $5,000 per eligible employee in 2020 and up to $21,000 per eligible employee in 2021, resulting in a total maximum credit of up to $26,000 per employee. Taken at a very high level, the credit is calculated as follows:

CARES Act (March 13, 2020 - December 31, 2020): The credit is based on qualified wages of up to $10,000 per employee paid after March 12, 2020, calculated at 50% across eligible quarters. This results in a maximum credit of $5,000 per employee for any eligible quarter, but is also capped at a maximum of $5,000 per employee for the year.

CAA (January 1, 2021 - June 30, 2021): The credit is based on qualified wages of up to $10,000 per employee per quarter, calculated at 70%. This results in a maximum credit of $7,000 per employee per quarter, or $14,000 total per employee for the applicable period.

ARPA (July 1, 2021 - December 31, 2021*): The credit is based on qualified wages of up to $10,000 per employee per quarter, calculated at 70%. This results in a maximum credit of $7,000 per employee per quarter. (The credit was originally applicable through December 31, 2021, but the fourth quarter was later terminated for most businesses as detailed in Notice 2021-65. It is, however, still available in the 4th quarter for eligible Recovery Startup Businesses).

Who qualifies?

Eligible employers must pass either a "significant decline in gross receipts test" OR "government suspended operations test" in order to qualify. The credit is then calculated and claimed on a quarterly basis. The credit can be claimed in arrears by preparing and submitting the necessary documentation.

Significant decline in gross receipts test:

CARES Act (March 13, 2020 - December 31, 2020): A "significant decline in gross receipts" begins with the first calendar quarter in 2020 in which an employer's gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer's 2020 quarterly gross receipts are greater than 80% of its gross receipts for the same calendar quarter in 2019.

CAA (January 1, 2021 - June 30, 2021): A "significant decline in gross receipts" is considered to have occurred if an employer's gross receipts for the calendar quarter in 2021 are less than 80% of its gross receipts for the same calendar quarter in 2019. Alternatively, the employer may elect to use the prior quarter for comparison - for example for a 2021 Quarter 1 credit the employer may compare 2020 Quarter 4 against 2019 Quarter 4.

ARPA (July 1, 2021 - December 31, 2021*): A "significant decline in gross receipts" is considered to have occurred if an employer's gross receipts for the calendar quarter in 2021 are less than 80% of its gross receipts for the same calendar quarter in 2019. Alternatively, the employer may elect to use the prior quarter for comparison - for example for a 2021 Quarter 1 credit the employer may compare 2020 Quarter 4 against 2019 Quarter 4.

Government suspended operations test:

For both 2020 and 2021, the credit is available to businesses with operations that are fully or partially suspended by a COVID-19 government order for the duration of time the order is in force. The specifics of a shutdown, especially a partial shutdown, depend on the facts and circumstances and as a result may require a complex analysis to determine. The credit is only available for the specific period of suspended operations, even if only a portion of a particular quarter.

Special Rule for "Recovery Startup Businesses"

A Recovery Startup Business is a business that began carrying on a trade or business after February 15, 2020, its average annual receipts do not exceed $1 million for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined, and who is not otherwise eligible due to a full or partial suspension of operations or decline in gross receipts. Recovery Startup Businesses are eligible for up to $50,000 per quarter for 2021, quarters 3 and 4.

**This is a brief summary of the Employee Retention Credit, which is far more complex than explained here. Other restrictions and conditions apply.

What next?

Grandjean, Wagner, Beiter & Company is committed to assisting clients with the Employee Retention Credit, including coordination with your payroll service and/or existing accountant or bookkeeper.

If you believe you may be eligible for this credit, follow the link below to get started.