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Breaking Down the Employee Retention Credit in the New COVID Relief Bill

By Ilya Brodetskiy, Tax Manager

Some significant updates are affecting the Employee Retention Credit, but there are still some important unknowns.

Businesses that were ineligible for the ERC because they applied for PPP funding or who had over 100 full-time employees should reevaluate their eligibility based on the expanded program.

The Consolidated Appropriations Act of 2021 introduced major changes to the Employee Retention Credit (ERC).  The first change allows businesses that received funds from a PPP loan to retroactively claim a ERC for 2020.  The second change extends the ERC through June 30, 2021, and significantly changes the calculation of the credit for the first two quarters of 2021.

Here is a summary comparison of the Employee Retention Credit rule for 2020 and 2021:

 20202021
What Is It?Refundable Credit equal to 50% of “Qualified Wages” an eligible employer pays to its employees between March 12,2020 and December 31, 2020Refundable Credit equal to 70% of “Qualified Wages” an eligible employer pays to its employees between January 1,2021 and June 30, 2021
Maximum Credit$5,000 per employee for all affected quarters ($5K maximum)$7,000 per employee for each affected quarter ($14K maximum)
Who is Eligible?a. Fully or partially suspends operation during any calendar quarter in 2020 due to order from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or

b. Experiences a significant decline in gross receipts during the calendar quarter.
a. Fully or partially suspends operation during any calendar quarter in 2020 due to order from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or

b. Experiences a significant decline in gross receipts during the calendar quarter.
What is meant by “significant decline in gross receipts”?Begins in first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are 50% of its gross receipts for the same calendar quarter in 2019. Ends with the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80% of its gross receipts for the same calendar quarter during 2019.
a. First-quarter in which an employer’s gross receipts for a calendar quarter in 2021 are less than 80% of its gross receipts for the same calendar quarter in 2019; or

b. Election to measure gross receipts in the immediately preceding calendar quarter, and comparing to the corresponding quarter in 2019.
Qualified WagesIf 100 or fewer full-time employees in 2019 – gross wages (including allocable health care costs) paid to any employee during the period of economic hardship described above.

If more than 100 full-time employees in 2019 – wages paid to employees who are paid to NOT PROVIDE SERVICES (paying employee not to work) because of either:

a. Suspension of operation by government order.

b. Significant decline in gross receipts.

Qualified wages are CAPPED based on what the employee would have been paid for working an equivalent duration during the 30 day period immediately before the eligible quarter in which wages were paid.

If 500 or less full-time employees in 2019 – gross wages (including allocable health care costs) paid to any employee during the period of economic hardship descried above.

If more than 500 full-time employees in 2019 – wages paid to employees who are paid to NOT PROVIDE SERVICES (paying employee not to work) because of either:

a. Suspension of operation by government order.

b. Significant decline in gross receipts.

NO CAP on wages paid during eligible period (bonuses are eligible to maximize credit).

There are a number of unanswered questions in regards to how to claim the ERC retroactively to 2020 for businesses that received PPP funds.  We are awaiting guidance from the IRS on a number of issues, including: Allocation of costs between the PPP and ERC (ordering rules to maximize both programs); Definition of costs to be included in qualified wages for businesses that have already applied for PPP forgiveness; and Procedures for claiming the retroactive credit (amending versus a “catch-up credit in 2021).

While we await additional guidance, we are suggesting that our business clients take the following steps in preparation for analysis and determination of best strategies to take advantage of both programs to their full extent.

  1. Summary of gross revenue by quarter for 2019 and 2020.
  2. Summary of quarterly payroll by employee for 2020.
  3. Calculation of average monthly Full-Time Equivalent Employees for 2019.
  4. If you already applied for PPP forgiveness, the amount of payroll and allocable health care costs used in calculation by quarter.
  5. If you have not applied for PPP forgiveness, hold off applying until further guidance is available.

Questions about ERC, PPP, or any other aspect of the new COVID relief bill?

COVID Relief, COVID-19, Employee Retention Credit, ERC, Ilya Brodetskiy, PPP, PPP2

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