The Employee Retention Credit (ERC) has been utilized since the CARES Act as a way to help employers with partially or fully restricted operations or with significant declines in gross receipts to help pay employees for paid leave and benefits beyond what was required and reimbursed via FFCRA emergency paid leave tax credits. Smaller employers have been able to utilize it during qualifying quarters for regular wages, too (not limited to just funding paid leaves). However, governmental employers in the public sector have largely been ineligible for the ERC.
The Consolidated Appropriations Act of 2021 had included a provision to modify it retroactively for 2020 (so employers with PPP loans could qualify after all) and to extend it with major adjustments for the first half of 2021.
Now the American Rescue Plan Act of 2021 (ARPA) extends it through the end of 2021, with a few more tweaks.
- The ERC is claimed against the employer’s share of Social Security taxes through June 30, 2021
- ARPA claims the ERC against the employer’s share of Medicare taxes from July 1, 2021, through December 31, 2021
- Otherwise, the ERC remains largely the same as the 2021 rules we already have (70% credit on up to $10,000 of wages and benefits per quarter per employee)
- This effectively means a qualifying employer could claim up to $7,000 in ERC tax credit per employee per quarter, or $28,000 per person employed all four quarters in 2021 (noting the vast majority of large employers with >500 employees are only able to claim this for paid leave, not on all wages and benefits paid during the quarter)
- A “severely financially distressed employer” with gross receipt losses of at least 90% could qualify to claim the credit with respect to all wages and benefits even if the employer exceeds 500 employees
- ARPA creates a $50,000 quarterly cap for a “Recovery Startup Business” which began operations after February 15, 2020, with gross annual receipts up to $1 million
- The statute of limitations on the ERC is extended from three years to five years under ARPA
We encourage employers to consult with their CPA/tax counsel when seeking to claim these credits to ensure compliance with the intricate rules. Always remember there’s no double-dipping, so:
- Wages and benefits for which another tax credit has already been claimed (or which was paid for via a forgiven PPP loan) cannot be claimed under this credit, and
- Wages and benefits for which any kind of tax credit is claimed is typically not able to be deducted as a normal business expense (with the exception of those paid under a forgiven PPP loan)
IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.
This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.