The 2021 Employee Retention Credit – Back and Better Than Ever
February 05, 2021
By Jeffrey Kelson and Benjamin Aspir
The sequel is much better than the original version of the employee retention credit (“ERC”). The new and improved (refundable) ERC is now available to a broad cross section of companies, with the potential for millions in savings on payroll taxes. In March 2020, the CARES Act created the ERC. The ERC had been overshadowed by the Paycheck Protection Program (“PPP”) due to a prohibition on companies from obtaining both the ERC and PPP funds. Under the recently passed Consolidated Appropriations Act, 2021 (“CAA”), companies that receive PPP loans may still qualify for the ERC (for wages that are not paid with forgiven PPP proceeds). The ERC is a fully refundable payroll tax credit for employers.
Under the CAA, for the first two quarters of 2021, taxpayers have a much greater opportunity to avail themselves of the ERC. In addition to an expansion of the credit, the maximum ERC credit has been significantly increased with greater potential for tax savings.
In order to qualify for the ERC, a company must experience either partially or fully suspended operations due to restrictions imposed by the government or a significant decline in gross receipts. For 2020 a “significant decline” in gross receipts is if an employer’s gross receipts for a given quarter are less than 50% of their gross receipts for the same calendar quarter in 2019. However, for Q1/Q2 of 2021 under the CAA an eligible quarter requires a gross receipts decline of more than 20% as compared to the same applicable quarter in 2019. For 2021 an optional election is available which allows a lookback to the prior quarter if there hasn’t been a 20% decline in gross receipts in either Q1 or Q2 of 2021 as compared to 2019. The election allows a lookback at gross receipts of the immediate preceding calendar quarter. For instance, in Q1 2021, a taxpayer can use Q4 2020 and compare its gross receipts to Q4 2019.
A company that qualifies for the ERC must determine the number of average monthly full-time employees (“FTEs”) it had in 2019. A significant beneficial change under the CAA for 2021 allows eligible companies with 500 or less average monthly FTEs in 2019 to claim the credit for employees, whether working or not. The 2020 ERC threshold was 100 or less average monthly FTEs in 2019. The CAA changes to the ERC for 2021 provide an exponential increase in potentially eligible companies, coupled with an increase in the maximum amount of the credit. For 2021 if a company had more than 500 average monthly FTEs in 2019, then it may only claim the credit on wages/health plan expense paid for employees that were not working during the eligible time period. For the 2020 tax year the threshold was 100 or less average monthly FTEs in 2019.
For the tax period of 1/1/21-6/30/21 the new limitations are as follows:
- The ERC is extended through June 30, 2021.
- The credit percentage is increased from 50% to 70% of the first $10,000 of quarterly wages and health plan expenses paid to their employees in a calendar quarter.
- The maximum amount of qualified wages and health plan expenses taken into account with respect to each employee is the following:
- Q1/Q2 2021: $14,000 ($7,000/quarter).
- 2020: $5,000 for the entire year.
The ERC is claimed on IRS Form 941, “Employer’s Quarterly Payroll Tax Return.” An eligible company may reduce its federal employment tax deposits by the allowable ERC amount. If the ERC exceeds the remaining federal employment tax deposits for that quarter, the company may file Form 7200 to claim an advance refund. A tax professional should be consulted to determine ERC eligibility.