The recently enacted stimulus law extends a number of provisions for businesses struggling to cope with the pandemic. For instance, the law greatly expanded the effectiveness of the Employee Retention Credit (ERC). Originally, businesses had to choose between taking the Paycheck Protection Program (PPP) or the ERC. For most employers, the PPP provided more benefit and more businesses qualified for PPP. However, employers that meet the qualifications for the ERC can now claim the credit for 2020 retroactively. Additionally, the credit was extended through June 30, 2021 with significant enhancements.
Employers that claimed the PPP cannot use the same wages for both the PPP and ERC. It will require a thorough analysis to maximize the benefits of both the PPP and ERC. The IRS has not issued formal guidance with regard to this and other issues. Therefore, it is most likely beneficial to wait for further guidance in order to maximize the ERC. As the ERC is a payroll credit you have three years to file for a refund with interest. In the meantime, we advise that it would be beneficial for employers to determine if they may qualify for the ERC.
ERC Details
2020 Version of ERC
Available for all wages paid to employers with less than 100 employees. Only wages paid to employees for not working count for employers with more than 100 employees.
Credit Amount: 50% of employee’s wages (including employer paid health insurance) of up to $10,000 paid during the year.
Eligible payroll in 2020 is payroll paid either:
1. For any part of the quarter the business was completely or partially closed, due to government order related to Coronavirus, or
2. For any calendar quarter where gross receipts drop at least 50%, as compared to the same quarter in the prior year. Eligibility continues until the end of the first quarter where gross receipts were at least 80% of the receipts for the same quarter in the prior year.
2021 Version of ERC
All employers with less than 500 employees qualify including certain governmental entities.
Credit Amount: 70% of employee’s wages (including employer paid health insurance) of up to $10,000 paid per quarter. The credit is available for the first two quarters of 2021, 1/1/21-6/30/21.
Eligible payroll in 2021 is payroll paid either:
1. For any part of the quarter the business is completely or partially closed, due to government order related to Coronavirus, or
2. For all payroll in a calendar quarter where gross receipts drop at least 20% from the same quarter in 2020. There is a safe harbor to use the gross receipts of the prior quarter to determine the drop.
Note: IRS guidance indicates that employers that were considered essential businesses or that were able to continue operations through teleworking generally do not meet the shutdown criteria.
It may be useful for businesses to do an analysis of their sales for each calendar quarter in 2020 compared to 2019 to see if they may qualify for the retroactive credit.
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