As the global pandemic is still ongoing, the ERC has been extended so that now for all four quarters of 2021 employers may be able to claim the credit. (Photo: Shutterstock)In early March of this year, President Joe Biden signed into law the $1.9 trillion American Rescue Plan Act. Among the Act’s provisions was the further extension of the Employee Retention Credit (ERC), a refundable tax credit for employers that have suffered financial hardship caused by the COVID-19 pandemic. The ERC was first made available on March 27, 2020 through the enactment of the Coronavirus Aid, Relief and Economic Security (CARES) Act, and then previously extended through the Taxpayer’s Certainty and Disaster Relief Act on December 27, 2020.
Related: An important SECURE and CARES Act reminder for plan administrators
Employers may be eligible for up to $33,000 in tax credits per employee. Many organizations may be unfamiliar with the recent changes to the legislation and its extension. Below is a summary of important information to know about the ERC and how your organization can ensure it is maximizing the opportunity.
Key updates to the Employee Retention Credit
As the global pandemic is still ongoing, the ERC has been extended so that now for all four quarters of 2021 employers may be able to claim the credit. An eligible employer can receive 70% of the first $10,000 of qualified wages paid per employee for each quarter. This stands in contrast to 2020, for which an eligible employer can only be able to receive credit for 50% of the first $10,000 of qualified wages paid per employee for all quarters of 2020. The maximum per quarter of 2021 is $7,000, for a total maximum of $28,000 per employee. The maximum ERC for all four quarters of 2020 is $5,000 per employee receiving qualified wages. As the IRS states, qualified wages depend on the number of individuals employed at an eligible organization.
The IRS has outlined the criteria for determining whether or not an employer qualifies for the ERC that includes private-sector organizations, tax-exempt entities, and government entities that are a college, university, or business primarily used for medical or hospital care.
An important change for the ERCs covering the 2021 year is the increase in the employee size threshold: Instead of 100 full-time employees as the cutoff, the cutoff is 500 full-time employees. Employers under the threshold can receive ERCs for qualified wages regardless of whether those wages were paid for hours of service or not. Employers over the threshold can receive ERCs for qualified wages only if the wages were paid for hours of service that were not provided. The definition of a full-time employee in the ERC context is an employee who had an average of at least 30 hours of service per week or 130 hours of service in a month, the same context established under IRC Section 4980H of the ACA’s Employer Mandate.
How employers can check for eligibility
The general criteria for claiming ERC requires the organization to meet one of the following criteria:
- The employer’s operations were fully or partially suspended due to COVID-19 related governmental order; or
- The employer incurred a decline in gross receipts during a calendar quarter compared to the same calendar quarter during 2019
- For quarters in 2020, the decline must be greater than 50%
- For quarters in 2021, the decline must be greater than 20%
Employers that received the Paycheck Protection Program (PPP) may also be eligible to claim the ERC but should perform a careful analysis to ensure that they minimize risk of compliance issues (and associated audits). Special attention should be given to the timing of the PPP loan and ERC refund claims to maximize the financial benefits. The same wages cannot be used to qualify for forgiveness of a PPP loan and also be treated as ERC qualified wages.
To the extent that PPP forgiveness allocated to wages is less than total wages in a quarter, businesses can treat remaining wages in that quarter as ERC-eligible. In addition to the PPP, it is important to perform a careful review to avoid the possibility of “double-dipping” between ERC and the following:
- FFCRA
- Other paid sick and family leave credits
- R&D Tax Credit
- Work Opportunity Tax Credits
- Indian Employment Credits
- Employer wage credits for active military duty members
- Empowerment Zone Credits
- SVO Grants & Restaurant Revitalization Grants
Many organizations mistakenly believe that they do not qualify for the ERC because they have more than 500 employees. The eligibility criteria is based on full-time employees as measured under IRC Section 4980H, the Employer Mandate that requires Applicable Large Employers (ALEs), which are employers with 50 or more full-time employees and full-time-equivalent employees to offer Minimum Essential Coverage to at least 95% of their full-time employees (and their dependents) and whereby the coverage is affordable and meets minimum value to the employee. For example, if a restaurant with multiple locations has 1,400 employees but only 370 of them are full-time in 2019, the employer could be eligible to receive significant savings in tax credits.
What’s needed for filing
Like other submissions to the IRS, employers need to be prepared with proper documentation to support their claims. If an employer is basing its eligibility on a suspension due to a COVID-19 related governmental order, they should retain a copy of the relevant order showing the suspension, and the duration of that suspension. If the employer is basing eligibility under the decline in gross receipts, the employer should maintain documentation to show the decline in gross receipts for the qualifying period.
It is also particularly important for employers to have documentation of their full-time employee count and calculations to support the amount of ERCs. Records should include qualified wages and if the company is a PPP borrower, documentation of exclusion from qualified wages should be maintained. Unfortunately, most organizations cannot accurately perform the required full-time measurements and the IRS extended the Statute of Limitations from the standard three years to five years, foreshadowing an increased likelihood of future audits.
Finally, to ensure an employer receives the largest possible refund, employers should look to compliance tools that accurately calculate full-time employee counts as defined by the ACA guidelines. Employers that are unsure if they qualify for ERCs should take advantage of vendors that will analyze their workforce from an ACA perspective, identify potential risks associated with other workforce incentive programs, and maximize potential credit savings while minimizing IRS audit risk.
Robert S. Sheen is CEO and founder of Trusaic.
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