EMPLOYEE RETENTION CREDIT CHANGES MAKE IT AVAILABLE TO MORE EMPLOYERS
The Employee Retention Credit (ERC) found in the CARES Act (signed into law on March 27, 2020) did not originally receive much attention from small business employers. This is because under the CARES Act, employers could not claim the ERC if they participated in the Paycheck Protection Program (PPP). The stimulus act signed into law at the end of December 2020 changed this retroactively. Now, qualifying employers can participate in both the PPP and the ERC, but they cannot use the same wages for both incentives.
The new law extended the ERC through the first two quarters of 2021 and made significant changes to the credit as of January 1. In 2020, the credit is 50% of qualifying wages up to a cap of $10,000 (for a maximum credit of $5,000) per employee for all of[redacted]In 2021, the credit is 70% of qualifying wages up to a cap of $10,000 per employee per quarter. So, a qualifying employer could receive a credit of up to $7,000 per employee per quarter for the first two quarters of 2021.
To qualify for the credit, an employer must either be fully or partially shut down due to a government order or have experienced a reduction in gross receipts in a given quarter compared to the corresponding quarter in[redacted]The reduction in gross receipts threshold for 2020 is 50%, while only a 20% reduction in gross receipts is required to qualify in[redacted]In 2021, an employer can elect to look at the previous quarter for the measurement, so for the first quarter of 2021, we could compare Q1 2021 with Q1 2019 or choose to compare Q4 2020 with Q4 2019.
Small employers can claim the credit on all qualifying wages paid during the eligible period, but large employers only get to claim the credit on wages paid to employees that perform no services for those wages due to a shutdown. For 2020, the threshold for being a small employer is to have no more than 100 full-time employees. In 2021, that threshold is increased to 500.
Since the same wages cannot be used for both the PPP and ERC, questions have arisen about how the two incentives interact. The IRS website has almost 100 FAQs on the ERC, but that guidance has not yet (as of this writing) been updated to take into account the new law changes. One concern is that the receipt of second-round PPP funds, which starts the PPP2 covered period, may impact ERC eligibility for wages paid after that date. Future guidance may allow us to exclude some covered period wages from the PPP2 forgiveness calculation, leaving them available for the ERC. But until that guidance is released, it remains unclear. This uncertainty has led some employers to consider delaying their PPP2 applications to maximize the wages available for the ERC. Applications for PPP2 loans must be submitted to the SBA by March 31, 2021.