How Does Employee Retention Credit Work?
The ERC gives employers a major opportunity to get a payroll tax credit
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There have been several iterations of relief legislation since the pandemic began in early 2020. Most of these have included some kind of change to the ERC. Here is a comprehensive list of the ERC changes to know from 2020 to 2021:
The initial ERC only went through the end of 2020 and then was extended until June 30, 2021. The American Rescue Plan then extended the credit to Dec. 31, 2021. The subsequent IIJA backtracked that, however, and ended the program on Sept. 30, 2021, for the majority of U.S. businesses.
The percentage of qualified wages that can be used to calculate the ERC was expanded for 2021 quarters. It went from 50% of up to $10,000 wages in 2020 to 70% of up to $10,000 in 2021. This percentage also applies to each quarter of 2021, not the whole year, like in 2020.
One of the ERC eligibility requirements is to have a decline in gross receipts from either 2020 or 2021 when compared to 2019. This amount was at least 50% less for 2020, and that percentage changed to at least a 20% decline in 2021. This means that more businesses likely qualify in 2021 since that requirement is more generous.
Employers can get a bigger credit in 2021 because of the increase in qualified wages. You can claim up to $5,000 per year in 2020 and up to $7,000 per quarter in 2021, or $21,000 per employee for all of 2021. This is a significant increase from one year to the next.
It’s also important to pay attention to how ERC legislation defines “large” versus “small” employers. Large employers were considered those with more than 100 full-time employees in 2020. That definition changed in 2021 to businesses with more than 500 full-time employees. Large employers can only claim wages that were paid to employees not providing services. More employers qualified in 2021 to take the full credit since that definition changed.
The ERC and the PPP were both created by the CARES Act to help employers maintain their staff levels and get much-needed support through the COVID-19 pandemic closures and losses. Businesses that received a PPP loan initially couldn’t also claim the ERC. Successive legislation, however, changed those terms. You can now apply for the ERC even if you received a PPP loan. You just can’t use the same wages that were paid for with funds from your PPP loan to calculate your credit.
The CARES Act stated that “any employer operating a trade, business, or a tax-exempt organization, but not governments, their agencies, and instrumentalities” were eligible for the ERC. The ERC was expanded in 2021 to include some governmental employers, including those described in section 501(c)(1) and that are exempt from tax, and colleges or universities that principally provide medical or hospital care services.
The IIJA limited the last quarter of 2021 to recovery startup businesses, meaning these businesses could qualify for all four quarters of 2021. Other businesses only qualify for the first three quarters of 2021.
Most changes made by legislation after the CARES Act expanded and extended the ERC so more businesses were eligible and could claim the credit for more quarters. They still had to have closed because of a government order or lost gross receipts.
