The recently signed stimulus bill brought big changes to the Employee Retention Credit (ERC). The CARES Act added the ERC which, under certain circumstances, provides a credit of up to $5,000 per employee for qualifying wages paid. However, there was one catch – an employer could not benefit from the ERC if they also had a Paycheck Protection Program (PPP) loan. This has changed with the passage of the Consolidated Appropriations Act, 2021, which contained the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“TCDTR”).
Before we get into the changes TCDTR made to the ERC, let’s take a high-level look at the ERC.
In order to qualify, the employer must meet one of two conditions:
Which employees’ wages will qualify for the credit will be dependent upon the number of 2019 full time equivalents (FTE) of the employer?
Now that a determination is made of the qualifying employers and the qualifying employee wages, how is the credit determined?
Wages include compensation paid and an allocable portion of the health insurance. The credit is 50% of the qualifying wages for the employee, to a maximum of $10,000 of wages for the year. Therefore, the maximum amount of the credit is $5,000 per employee for 2020.
An employer may take the credit on their quarterly Form 941. In anticipation of the credit, the employer may deduct the amount of the credit from their required payroll deposits. In addition, if the credit is in excess of the payroll tax deposit, the employer may file Form 7200 throughout the quarter requesting an advance payment of the excess credit amount.
2020 Changes by TCDTR
As mentioned above, the biggest change brought on by TCDTR was the fact that employers with a PPP loan are now eligible for the ERC. This change is effective retroactively to March 12, 2020. The caveat? The same wages cannot be used for PPP forgiveness and the ERC.
2021 Changes by TCDTR
The ERC was scheduled to expire at December 31, 2020, but TCDTR has extended the ERC until June 30, 2021 along with the following changes which are effective for 2021 only:
With the changes to the ERC, particularly the ability to have a PPP loan and still qualify for the ERC and the lower thresholds in 2021, it is expected that more employers will qualify for the ERC. Businesses with PPP loans that have not applied for forgiveness or will be applying for a PPP II loan, will want to maximize the forgiveness of the PPP loan by utilizing non-wages expenditures to the extent allowed while using the remaining wages to maximize the ERC.