Among the many challenges facing businesses in the pandemic is protecting and retaining their workers. A new federal law has expanded the Employee Retention Credit (ERC) and extended the deadline for companies to use it.
What is the Employee Retention Credit (ERC)?
The ERC is a credit for employers to collect against employee compensation. The 2021 Consolidated Appropriations Act allows companies to use the credit until June of this year.
- This means qualified employers can claim a refundable tax credit against 50% of a worker’s wages that were paid between March 13 and December 31, 2020. The tax credit is capped at $10,000 per employee.
- Eligible employers can claim a credit of 70% of qualified employee wages earned (capped at $10,000 per employee for each of the first and second quarter) in 2021. The maximum amount to claim the credit per employee is $7,000 per quarter or $14,000 from January to June this year.
How do I know if my company is eligible?
You can qualify for the credit if you own and operate a trade or business (new companies and essential businesses are included) and have experienced the following hardships:
- Your operations were fully or partially suspended because of COVID-19 government orders. Keep in mind that the tax credit is only allowed for the time during the quarter your business was halted. Not all businesses would be eligible, according to the IRS.
- A trade or business that may not qualify under the first factor test above may still qualify if the gross receipts of a calendar quarter are down considerably. In 2020, a company would be eligible if the gross receipts were less than 50% compared to the same quarter in 2019.
- Beginning in 2021, a trade or business must experience a 20% dip in gross receipts as compared to the same quarter in 2019 because of a forced company shut down or quarantine. The 2021 law does allow a trade or business to use the quarter immediately preceding the current quarter to determine 20% decrease in gross receipts. For example, a business may use the fourth quarter 2020 gross receipt compared to fourth quarter in 2019 when determining eligibility for the first quarter of 2021.
The Employee Retention Credit is not allowed on forgiven wages, or compensation that is expected to be excused under the Payroll Protection Program (PPP). Overlapping of benefits for employers is prohibited for previously qualified COVID sick leave or paid family medical leave.
IPS expects there will be additional guidance from federal agencies in the weeks ahead to clarify and better define the limitations. The IRS’ offers this FAQ on COVID-19-Related Employee Retention Credits as a resource.