This is to alert Vertical Advisors’ clients about Expansion and extension of Employee Retention Credit (ERC) provided by the Consolidated Appropriations Act, 2021 (CAA, 2021) which was signed on December 27, 2020. This credit is also available for the period March 12, 2020 to January 1, 2021 based on the prior bill called Families First Coronavirus Response Act. However, if a business received a PPP related to the prior period, generally the credit will not apply.
Under the CARES Act, the Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before Jan. 1, 2021. The CAA includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), which extends and expands upon the ERC provided by the CARES Act until June 30, 2021 (Sec. 207).
This credit will generally benefit businesses that have employees that did not receive PPP money. However, if a business has received PPP money, the ERC could still be applied related to wages not included in the PPP covered period.
As noted above, the credit applies to wages paid in both 2020 and 2021.
For wages paid prior to 12/31/2020, the credit amount is 50% of qualified wages, up to $10,000 in total per employee. Thus, the maximum Retention Credit in total amount is $5,000 per employee. The Retention Credit applies to:
- The employer’s share of Social Security tax under IRC Section 3111(a) (6.2% of wages)
- The portion of the employer’s and employee representative’s share of RRTA tax under IRC Sections 3211(a) and 3221(a) that corresponds to the 6.2% Social Security tax rate due.
If the Retention Credit exceeds the employer’s Social Security or RRTA tax liability for the quarter, the excess may be refunded to the employer. The credit will need to be claimed on IRS Form 941 (Quarterly Payroll form). Please see Item D of this section for details on how to claim and report the credit.
For wages paid after 12/31/2020, the credit amount is 70% of qualified wages, up to $10,000 per quarter (up from $10,000 total) of qualified wages paid to an employee. Thus, the maximum ERC amount available for 2021 is $14,000 per employee ($7,000 per quarter). This would apply to Q1 and Q2, 2020 payroll form 941. If you have already filed the forms, it can be amended.
CAA also allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year (Sec. 207(e)(1)).
CARES Act section 2301 created the ERC for wages paid from March 13, 2020 to December 31, 2020, by employers that are subject to closure or significant economic downturn due to COVID-19. The CAA extends the ERC to include wages paid before July 1, 2021 (from January 1, 2021). Qualifying wages are based on the average number of a business’s employees.
Prior to 12/31/2020, for employers of 100 or fewer employees, qualified wages are wages paid to any employee during a COVID-19 shutdown or during a calendar quarter with a significant decline in gross receipts, without regard to whether the employee is providing services; For employers of more than 100 employees, qualified wages remain wages (as defined under the Federal Insurance Contributions Act) paid for services an employee is not providing due to a COVID-19 shutdown or a significant decline in gross receipts.
CAA increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees (Sec. 207(e)(1) for period beginning after 1/1/2021.
The CARES Act previously contained a limitation that qualified wages paid or incurred by large employers could not exceed what the employee would have been paid for an equivalent amount of work in the 30 days immediately preceding the period for which the employer claimed the credit. The expanded ERC eliminates this limitation.
All employers are eligible for the employee retention credit, including tax-exempt organizations. There is no size limitation or threshold.
Prior to 12/31/2020, to be eligible for the Retention Credit for the period, an employer must carry on a trade or business in 2020 that experiences one of the two following COVID-19-related occurrences:
(1) COVID-19 Shutdown: operations were fully or partially suspended on orders from a governmental authority due to COVID-19, or
(2) Gross Receipts Decline: the business experienced a 50% reduction in gross receipts for a calendar quarter as compared to the same calendar quarter in the prior year.
- For 1/1/2021-6/30/2021, CAA Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility (Sec. 207(d)(2)(B))
Employers who received forgiven PPP loans can still qualify for ERC: As originally enacted, employers who received PPP loans were not eligible to claim the ERC. Retroactive CAA, 2021 provisions retroactively clarifying the limitation such that employers who receive PPP loans may elect to treat payroll costs paid during the loan-covered period as qualified wages to the extent the wages are not paid for with forgiven PPP loan proceeds (Sec. 206(c)). As a result, for that portion of wages the employer may claim the ERC.
How to Claim ERC:
Form 941, Employer’s Quarterly Federal Tax Return, will be used to report total qualified wages and claim ERC for each calendar quarter. The nonrefundable portion of the ERC will be reported on line 11c and the refundable portion, if applicable, which is the amount that exceeds the employer’s social security or RRTA tax liability for the quarter will be reported on line 13d.
Wages paid by forgiven PPP loans are excluded from qualified wages. Therefore, if you have applied for PPP loan and did not pay it back, the portion of the loan used to pay wages will be subtracted from total qualified wages.
Please ensure the quarterly qualified wages and ERC are properly reported and claimed on Form 941. 2020 Q4 Form 941 is due by 1/31/2021.
Tax deduction offset: Please also note that ERC reduces the expenses that could otherwise deducted because CARES Act Sec. 2301(e) provides that rules similar to Code Sec. 280C(a) apply for purposes of applying the employee retention credit. Code Sec. 280C(a) generally disallows a deduction for the portion of wages paid equal to the sum of certain credits determined for the tax year. As such that an employer’s aggregate deductions would be reduced by the amount of the ERC.
If you are interested in VA running some numbers for your business related to the ERC, we will need the following items?
- Did you receive a PPP? If so, we will need the amount of the PPP, your covered period, and information about the loan forgiveness.
- We will need payroll reports for the ERC covered period.
- Please provide the quarterly wages report for Q2, Q3 and Q4.
- For Q1, please provide payroll report covering 3/13/2020-3/31/2020.
- Alternatively, you can share your payroll access with us.
- Please let us know if you need our assistance in the filing to claim the ERC.
If you have filed Form 941 without claiming the ERC for 2020 Q2-Q4, you can still claim the credit for by filing Form 941-X for each corresponding quarter. Generally, you may correct overreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date Form 941 was filed or 2 years from the date you paid the tax reported on Form 941, whichever is later.
Form 941-X cannot be electronically filed. If you did not claim ERC for Q2 and Q3 but have not file the 4th quarter Form 941, we recommend claim the credit on the original Q4 Form 941 as the claim is generally processed quicker on original returns. Then consider filing Form 941-X for Q2 and Q3 to claim remaining eligible credit.