To encourage employers to keep their employees on payroll during the pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law in March 2020, established the Employee Retention Tax Credit (“ERTC”), often referred to simply as the Employee Retention Credit (“ERC”). The ERC was amended and extended by both the Consolidated Appropriations Act (“CAA”), enacted in December 2020, and the American Rescue Plan Act (“ARPA”), enacted in March 2021. The ARPA extended eligibility for the ERC to recovery startup businesses, defined as businesses started after February 15, 2020 with receipts of less than $1 million. The Infrastructure Investment and Jobs Act (the “Infrastructure Act”), signed by President Biden on November 15, 2021, established for an early termination of the ERC as of September 30, 2021 for most employers. Recovery startup businesses can still claim the credit for qualified wages paid before January 1, 2022.
The ERC is a refundable tax credit against wages paid by eligible employers after May 12, 2020. The total available credit is significant – up to a potential $26,000 per employee, for most employers.
In 2020, an eligible employer may receive a credit up to 50% of the first $10,000 of wages paid to each full-time employee in the second, third or fourth quarter of 2020, for a maximum of $5,000 per employee for the calendar year 2020.
In 2021, the available credit increased to up to 70% of the first $10,000 of wages paid to each employee in each of the four quarters in calendar year 2021, for a maximum of $28,000 per employee for the calendar year 2021. In computing qualifying wages, the employer can take the cost of employer paid health benefits into consideration.
Qualification for the credit is based on two factors. The employer must meet one of the factors for each quarter it claims the credit:
- The employer’s operations were partially or fully suspended, or its business hours were reduced due to government order; or
- The employer experienced a significant decline in gross receipts defined as follows:
a. During 2020 a reduction of 50% or more quarter over quarter compared to the same quarter of 2019; and
b. During 2021 a reduction of 20% or more quarter over quarter compared to the same quarter of 2019.
- Recovery startup businesses may be eligible for the ERC even if they were not such down due to a COVID-19 shutdown order or did not experience a significant reduction in revenue. However, the ERC such businesses is limited to $50,000 per quarter.
The determination of whether an employer is eligible based on a decline in gross receipts is made separately for each calendar quarter. For example, if gross receipts in the second quarter of 2021 decline by more than 20% of gross receipts in the second quarter of 2019, then the employer is eligible for the ERC in the second quarter of 2021 based on a decline in gross receipts for the second quarter of 2021. Employers that are otherwise eligible for the ERC can also utilize the prior-quarter safe harbor in determining eligibility with regards to the gross receipts test in 2021 in order to claim the credit for an additional quarter. As a result, in the above example, the employer who is eligible for the ERC in the second quarter of 2021 will also automatically be eligible for the third quarter of 2021 using the prior-quarter safe harbor.
An employer is not disqualified from eligibility if it has received a PPP loan. However, the ERC cannot be claimed on wages that are taken into consideration in the employer’s computation of forgiveness of a PPP Loan.
There is still time to claim the credit on eligible wages.
Strobl Stark PLLC is a business law firm that can assist employers in determining eligibility and submitting applications for the credit, as well as partnering with clients on all business-related legal matters. For more information, visit Strobl online at StroblLaw.com or on LinkedIn.