Latest Stimulus Package Further Expands Eligibility, Benefits of Employee Retention Tax Credit by Andreea Cioara, CPA
The latest round of stimulus approved by Congress in response to the ongoing pandemic further enhances the employee retention tax credit (ERC) and the benefits it provides to eligible taxpayers that keep employees on payroll despite COVID-related suspensions of operations or declines in gross revenue.
With the enactment of the $1.9 trillion American Rescue Plan Act of 2021, qualifying businesses, nonprofits and certain federal entities must take the time to assess their eligibility for the credit and navigate the complex tax landscape required to apply the credit to their unique circumstances.
The CARES Act introduced the ERC in March of 2020 as a refundable payroll tax credit for eligible businesses and non-profits that continue to pay workers’ wages and certain costs for group health insurance despite business closures and interruptions to normal operations caused by the pandemic. At that time, the credit was equal to 50 percent of up to $10,000 in “qualified” annual wages paid to each employee between March 12, 2020, and Dec. 31, 2020, or a maximum of $5,000 per employee for the year. The law called for amounts employers paid in excess of their employees’ Social Security taxes to be treated as overpayments and refunded to employers or applied to offset any of the employers’ remaining tax liabilities for 2020.
As the pandemic endured, Congress in December passed a second round of COVID-relief that extended the ERC coverage period for six months (through June 30, 2021) while increasing the amount of the credit to 70 percent of up to $10,000 in qualified wages paid to each employee during each of the first two quarters of 2021, for a maximum credit of $7,000 per employee per calendar quarter, or $14,000 for the first two quarters of 2021. In addition, the Consolidation Appropriation Act of 2021 opened the ETC to taxpayers that received Paycheck Protection Program (PPP) loans to qualify for the credit.
Now, with Congress’s most recent enactment of the American Rescue Plan Act of 2021, the ERC coverage period is extended to Dec. 31, 2021. Therefore, a business with 25 employees may qualify for a tax credit of $125,000 for 2020 ($5,000 per employee for the year), plus up to $700,000 in government aid for all of 2021 ($7,000 per employee, per quarter).
Does my Organization Qualify for the Employee Retention Credit?
The expanded ERC is available to employers, non-profit organizations and tribal businesses with up to 500 employees to whom they pay qualifying wages through the expanded coverage period and that meet the following conditions:
- The entity’s operations are fully or partially suspended by government order due to COVID-19 during any calendar quarter of 2020 and/or 2021, or
- The employer’s gross receipts during any calendar quarter in 2021 fall at least 20 percent from the same calendar quarter’s receipts in the prior year.
In a departure from the original language of the law, which restricted eligibility to non-government entities, the recent stimulus bills open the ERC on Jan. 1, 2021, to public universities and college, entities providing medical and hospital care and certain federal credit unions. Additionally, the recent updates to the ERC expand eligibility to taxpayers that received government-backed loans, such as the PPP, to support their ongoing operations through the pandemic. However, for purposes of calculating the amount of the credit, employers cannot consider wages paid with forgiven PPP loan proceeds.
Employers that continue to pay workers throughout the prolonged pandemic, regardless of whether those individuals actually provided services, should meet with their tax advisors to assess their qualifications for the ERC both in 2021 and retroactively in 2020. For many taxpayers, including those that received PPP loans in 2020, the enhanced ERC can make a significant impact on their current financial position and their ability to survive and thrive moving forward.
About the Author: Andreea Cioara, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides corporate tax planning for clients through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.
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