By Madeline O. McElhanon, Erin A. James and Robert T. Smith
The Employee Retention Credit (ERC) was created by the CARES Act to encourage employers to keep employees on their payroll during the pandemic. Through subsequent legislation, Congress amended and extended the credit and the availability of certain advance payments of the credits through the end of 2021. Notably, following the subsequent amendments, businesses that received a Paycheck Protection Program (PPP) loan are now eligible to also claim the ERC provided certain qualifications are met.
Both eligibility for the ERC and the amount of credit received are determined on a quarterly basis. Eligible employers can receive a quarterly credit equal to 50 percent (for 2020) or 70 percent (for 2021) of “qualifying wages” paid per quarter. Qualifying wages are capped at $10,000 per employee for 2020 and $10,000 per employee per quarter for 2021. Thus, the maximum credit allowed per employee would be $5,000 for 2020 and $28,000 for 2021 (or $7,000 per quarter).
For March 13, 2020 through June 30, 2021, the ERC is credited against the amount of Social Security tax paid by the employer during such quarter. For the last two quarters of 2021, the ERC will be credited against the amount of the Medicare tax paid by the employer. Subject to some limitations, affiliation rules may aggregate related businesses to impact the eligibility of employers or the amount of qualifying wages.
The Infrastructure Investment and Jobs Act, if passed, would terminate the ERC early for most employers. Unless the employer is a “recovery start up business,” the credit would be unavailable for the fourth quarter of 2021.
Eligible employers are businesses and organizations (including certain tax-exempt organizations) that experienced:
- A full or partial shutdown of operations as a result of a government order limiting commerce due to COVID-19 during 2020 or 2021
- A decline in gross receipts of more than 50 percent for 2020 or 20 percent for 2021, when compared to the same quarter in 2019 (or 2020 if the employer was not in existence in 2019)
- A "recovery startup" business that was launched after February 15, 2020, and the employer’s average annual gross receipts for the prior three taxable years do not exceed $1,000,000, subject to a quarterly ERC cap of $50,000
Eligible employers can qualify for the ERC regardless of size. However, the determination of qualified wages differs for small and large businesses. For 2020, small businesses are employers with 100 or fewer full-time employees with large businesses having more than 100 full-time employees. For 2021, the employee threshold was increased to 500 employees, qualifying any business with over 500 full-time employees as a large employer. Qualified wages are as follows:
- For small employers: All wages paid to and qualified health plan expenses paid for all employees for the applicable quarter
- For large employers: Only wages paid to and qualified health plan expenses paid for employees for a period or periods that the employees did not perform services for the employer
For the third and fourth quarters of 2021, a large employer may benefit from the small employer expanded definition of qualified wages if they are considered “severely financially distressed.” A large employer is treated as severely financially distressed if the employer’s gross receipts for a given quarter are less than 10% of the gross receipts for the corresponding 2019 or 2020 quarter.
Claiming the Credit
The ERC can be claimed in the following ways:
- Access the ERC for the first and second calendar quarters of 2021 before filing employment tax returns by reducing employment tax deposits;
- Subject to some limitations, small eligible employers (businesses with less than 500 employees) can request advance payment of the credit on Form 7200, Advance Payment of Employer Credits Due to COVID-19, after first reducing their employment tax deposits; and/or
- File a claim for a retroactive ERC refund on previously paid qualified wages for past calendar quarters by filing Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.
We are advising businesses regarding their eligibility to claim the ERC. Please contact one the attorneys listed for assistance.
Madeline O. McElhanon is an associate in the Finance & Commercial Transactions Practice Group where she advises banking and other corporate clients on transactional, tax, securities and regulatory matters.
Madeline assists clients on a variety of corporate and commercial finance needs and helps create strategies to effectively safeguard their interests.
Erin A. James is an associate in the Mergers & Acquisitions Practice Group in the firm’s Rogers office. Her practice includes all aspects of business mergers and acquisitions, general business formation and choice of entities, including structuring, due diligence, negotiation and documentation. Erin also represents clients in all areas of taxation, including income taxation of individuals and corporate and other business entities; state and local taxation and tax incentives; tax controversies; and non-profit and tax-exempt entities.
Robert T. Smith heads the Finance and Commercial Transactions Practice Group and serves on the firm’s Management Committee. His diverse corporate practice focuses on representing companies and financial institutions in general business, transactional, securities and regulatory matters. He has handled transactions in a variety of areas including the banking, healthcare, real estate and technology industries.
Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.