An employer is eligible for the ERC by demonstrating it experienced either:
A full or partial suspension of business operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
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A significant decline in gross receipts (50% decline in gross receipts in 2020 from the same quarter in 2019; 20% decline in gross receipts in 2021 from the same quarter in 2019). While subject to certain restrictions, PPP recipients and certain instrumentalities of the government are permitted to claim the ERC if they meet on of the above eligibility tests. Eligibility is evaluated on a quarterly basis and based on each employer’s specific facts and circumstances.
Employers who are eligible for the ERC in a given quarter may qualify up to 50% of $10,000 in qualified wages in 2020 per employee for the year, and up to 70% of $10,000 in qualified wages in 2021 per employee, per quarter. Thus, the total potential ERC for an employer is $33,000 per employee.
What wages qualify for the ERC varies depending on whether an employer is considered a large or small employer. That important distinction is dependent upon an employer’s average full-time headcount in 2019. Under the CARES Act, “small” employers may qualify all wages paid and employer paid healthcare costs during an eligible quarter.
A “small” employer is defined in 2020 as an average of 100 or less full-time employees in 2019, and an average of 500 or less full-time employees in 2019 for the 2021 credit. An employer who is considered “large” under the CARES Act may qualify non-service wages and a proportionate amount of employer paid healthcare costs during an eligible quarter. In 2020, a “large” employer is defined as an employer with an average of more than 100 full-time employees during 2019. In 2021, a “large” employer is defined as an employer who averaged more than 500 full-time employees in 2019.
The ERC can be monetized by withholding federal payroll tax deposits (not FUTA) or requesting a refund from the IRS.
The CARES Act Employee Retention Credit
The CARES Act was signed into law on March 27, 2020, to address the negative economic impact of the COVID-19 pandemic. Within the CARES Act, Congress created the Employee Retention Credit (“ERC”), a fully refundable payroll tax credit, to provide aid to employers impacted by the COVID-19 pandemic.
As originally passed, the ERC was available to eligible employers from March 13, 2020 to December 31, 2020 and was equal to 50% of up to $10,000 in qualified wages paid to an employee (credit opportunity of $5,000 per employee for the 2020 tax year). Subsequent legislation (the Consolidated Appropriations Act, the American Rescue Plan Act, and the Infrastructure Bill) was enacted to address the continued economic impact of the COVID-19 pandemic which included certain enhancements and amendments to the ERC.
Among the enhancements was:
An extension of the ERC through September 30, 2021
An increase of the ERC amount to 70% of up to $10,000 in qualified wages paid to an employee per quarter (credit opportunity increased to $7,000 per employee per quarter for the 2021 tax year)