Employee Retention Credits (“ERC” or “credits”) were created as part of the CARES Act. Through significant expansions, ERC has become a significant form of COVID relief, similar to the PPP loan many non-profits have relied on. However, the infrastructure bill that the Senate passed (H.R. 3684) would end the ERC after the third quarter of 2021.
What is the ERC?
The ERC is a refundable payroll tax credit. For 2020, the ERC was 50% of annual qualified wages up to $10,000. Therefore, the credit was up to $5,000 per employee. For 2021, the ERC is 70% of quarterly qualified wages up to $10,000. Therefore, the credit is up to $7,000 per employee per quarter, or $28,000 per employee per year. (Please note, a separate credit limit applies to “recovery startup businesses” as discussed below).
Who is eligible?
Many organizations qualify.
- Gross Receipts Test:
Generally, if the company has 500 or fewer full-time employees and will have more than a 20% reduction in gross receipts for the quarter, as compared to the same quarter in 2019, the company would qualify.
- Suspension of Operations Test:
Most organizations that had operations fully or partially suspended by a government order due to COVID-19 also would qualify.
- Recovery Startup Business:
For the third and fourth calendar quarters of 2021, a recovery startup business will be able to claim the ERC as an eligible employer, limited to a maximum of $50,000. The IRS has defined a recovery startup business as an employer, including a tax-exempt organization, that began carrying on any trade or business after February 15, 2020, that is not otherwise an eligible employer due to the gross receipts test or the suspension of operations test.
How is it paid?
The ERC is claimed on the quarterly payroll tax return, Form 941. The company is allowed to hold onto the anticipated ERC from the federal payroll taxes it owes, thereby using the money in that quarter, however before doing this be sure to consult your tax advisor. If the ERC program ends after the third quarter of 2021 due to the passing of the infrastructure bill, the organization would need to payback the payroll taxes it withheld, and possibly also pay a penalty.
For more information, please see the IRS guidance: Notice 2021‑49.
DISCLAIMER: Please note that due to the evolving laws and regulations regarding the COVID‑19 epidemic the matters discussed in this client alert could change. This client alert is meant to provide an update and is not intended to provide legal advice. Please contact our office for timely advice.