New Laws Extend and Expand Employee Retention Tax Credit
During the Covid-19 pandemic, many businesses have worked hard to remain open and retain their workforce. Several relief measures have been enacted into law along the way to help with that, including the Employee Retention Tax Credit, or ERTC. Two fairly recent new laws have significantly expanded and extended the ERTC so that it is now available to more employers.
The ERTC came into being as part of 2020's CARES Act. In its original form, the ERTC was a refundable tax credit against certain employment taxes equal to 50% of qualified wages up to $10,000 per employee, that an eligible employer paid to employees after March 12, 2020, and before January 1, 2021.
ERTC Under the CARES Act
Under the CARES Act version, an employer could qualify for the ERTC in 2020 if:
- The business had a full or partial suspension of operations during any calendar quarter because of governmental orders limiting commerce, travel or group meetings because of COVID-19, or
- Gross receipts for a quarter were less than 50% for the same calendar quarter of 2019.
The definition of "qualified wages" depends on the size of the staff, with differing definitions for employers averaging more than 100 full-time employees (so called "large employers") versus those averaging 100 or less. Basically, large employers only qualify for wages paid to employees for the time they are not providing services, whereas smaller employers can qualify for wages paid to all employees.
Notably (and limiting), under the CARES Act, the ERTC could NOT be claimed by employers who received a Payroll Protection Program (PPP) loan.
Expansion Under the Consolidated Appropriations Act (CAA)
At the end of 2020, the CAA became law. CAA expands the eligibility for ERTC in several major ways:
- Extends the ERTC through June 30, 2021,
- Expands the rate of the credit from 50% to 70% of qualified wages, and increases the limit on creditable wages from $10,000 for all of 2020 to $10,000 per calendar quarter in 2021 (did you get that; that's potentially a $7,000 credit per employee per quarter),
- Retroactively removes the prohibition that kept PPP loan recipients from also qualifying for the ERTC (however, the same wages cannot be used for claiming both the ERTC and PPP loan forgiveness),
- Reduces the required year-over-year gross receipts decline from 50% to just 20%,
- Provides a safe harbor that allows employers to use the previous quarter's gross receipts to determine eligibility,
- Raises the 100-employee rule (i.e., large employers) for determining qualified wages to employers with 500 or fewer employees (meaning wages qualify for the credit even if the employee is working).
Extension Under the American Rescue Plan Act (ARPA)
The recently passed ARPA provides more good news for affected employers. The ARPA further extends the ERTC eligibility period from June 30, 2021 to December 31, 2021 under eligibility rules similar to those of the CAA. Guidance for this extended period is still pending from the IRS.
The implications of the upgrades to ERTC by the CAA and ARPA are significant. For example, if you haven't done the math yet, here it is - the maximum ERTC in 2020 per employee was $5,000 for the entire year; at $7,000 per quarter, an employer can potentially receive up to $28,000 in ERTC per employee for 2021!
Our team stands ready to help you determine whether your business qualifies for the ERTC.
