On March 11, 2021, President Biden signed the American Rescue Plan Act (the “ARPA”) which – among other things – modified and extended the Employee Retention Tax Credit (the “ERC”).
Congress originally enacted the ERC as part of the Coronavirus Aid, Relief and Economic Security (the “CARES”) Act in March of 2020 to encourage employers to hire and retain employees during the pandemic. At that time, the ERC applied to wages paid after March 12, 2020 and before January 1, 2021. However, Congress later modified and extended the ERC to apply to wages paid before July 1, 2021.
The ARPA extended and modified the ERC to apply to wages paid after June 30, 2021 and before January 1, 2022. Thus, an eligible employer can claim the refundable ERC against applicable employment taxes equal to 70% of the qualified wages it pays to employees in Q3 and Q4 of 2021.
Except as discussed below, qualified wages are generally limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021.
For purposes of the ERC, a qualified employer is eligible for the ERC if it experiences a significant decline in gross receipts or a full or partial suspension of business due to a governmental order. Employers with up to 500 full-time employees (i.e., small employers) can claim the credit without regard to whether the employees for whom the credit is claimed actually perform services. But, except as discussed below, employers with more than 500 full-time employees (i.e., large employers) can only claim the ERC with respect to employees that do not perform services.
It’s important to note that employers who received a Payroll Protection Program (“PPP”) loan in 2020 can still claim the ERC. But the same wages cannot be used both for seeking PPP loan forgiveness or satisfying conditions of other COVID-relief programs (such as the restaurant revitalization grants enacted as part of the ARPA) and in calculating the ERC.
Beginning in Q3 of 2021, the following modifications will apply to the ERC:
- Applicable employment taxes are the employer’s share of Medicare (also called hospitalization insurance or HI) taxes (equal to 1.45% of the wages) and the amount of the tax under the Railroad Retirement Tax Act payroll tax that is attributable to the employer’s HI tax rate. For Q1 and Q2 of 2021, applicable employment taxes were defined as the employer’s share of Social Security tax (equal to 6.2% of the wages) and the amount of tax under the Railroad Retirement Tax Act payroll tax that was attributable to the employer’s Social Security tax rate.
- A recovery startup business is a qualified employer. A recovery startup business is generally a business that began operating after February 15, 2020, and that meets certain gross receipts requirements. A recovery startup business will be eligible for a maximum credit of $50,000 per quarter, even if the business has not experienced a significant decline in gross receipts or been subject to a full or partial suspension under a government order.
- A severely financially distressed employer who has suffered a decline in quarterly gross receipts of 90% or more compared to the same calendar quarter in 2019 will be able to treat all wages (up to the $10,000 limitation) paid during those quarters as qualified wages. This rule will allow a large employer (i.e., an employer with over 500 employees) under severe financial distress to treat those wages as qualified wages whether or not its employees actually provide services.
- The statute of limitations for assessments relating to the ERC will not expire until five years after the date that the original return claiming the credit is filed or treated as filed. For example, if the Form 941 for Q4 of 2021 claiming the ERC is treated as filed on April 15, 2022, the return could be audited with respect to the ERC as late as April 14, 2027.
If you have any questions relating to how the extension or modification of the ERC may affect your business, please let me know.
Frank L. Leffingwell is a tax attorney in the firm’s Tax Planning & Controversy, Estate Planning & Trusts, and Real Estate practice groups.