Employee Retention Credit Guidelines

Posted: April 8, 2021

The second round of COVID relief was passed last month as part of the Consolidated Appropriations Act (CAA). This new Act enhances and extends the Employee Retention Credit (ERC) and now allows employers who previously received a PPP loan, to retroactively claim the credit as well by amending previously filed 941’s.

The credit is available to eligible employers with a trade or business that saw a decline in gross receipts due to a mandated shutdown that fully or partially suspended their operations. The ERC is a refundable credit that reimburses employers who continued to pay wages and/or certain health care costs to employees during the decline in operations.

Definition of “Eligible Employer”:

To receive the Employee Retention Credit, an employer must qualify as an “eligible employer.”
 
“Eligible employer” is defined as:

For 2020 Q2, Q3 and/or Q4 (for Q2, including 3/13/20-3/31/20), an employer that:

(1) Fully or partially suspended its operations due to a governmental order limiting commerce, travel, or group meetings due to COVID-19, or

(2) Had gross receipts for such quarter that were less than 50% of its gross receipts for the same quarter in 2019.
 
For 2021, an employer that:

(1) Fully or partially suspends its operations due to a governmental order limiting commerce, travel, or group meetings due to COVID-19, or

(2) Has gross receipts for such quarter that are less than 80% of its gross receipts for the same quarter in 2019 or for the immediately preceding quarter.

The following is a guideline of eligibility requirements for the 2020 and 2021 versions of the Employee Retention Credit.

ERC 2020 guidelines:

  • Decline in gross receipts of at least 50% in any quarter in 2020 when compared
    to the same quarter in 2019
  • Qualified wages and health care benefits paid between 3/13/20 and 12/31/20
  • Wage limit capped at $10,000 per employee per year
  • Credit equals 50% of qualified wages
  • Maximum credit of $5,000 per employee per year
  • Employers averaging less than 100 full time employees can take the credit on all wages paid during the noted time period
  • Health insurance costs that the employer continued to pay may count towards qualified wages

ERC 2021 guidelines:

  • Decline in gross receipts of at least 20% in any quarter in 2021 when compared to the same quarter in 2019 OR a prior quarter in 2020/21
  • Qualified wages and health care benefits paid 1/1/21 through 6/30/21
  • Wage limit capped at $10,000 per employee per quarter
  • Credit equals 70% of qualified wages
  • Maximum credit of $7,000 per employee per quarter
  • Employers averaging less than 500 full time employees can take the credit on all wages paid during the noted time period
  • Health insurance costs that the employer continued to pay may count towards qualified wages
  • PPP loan borrowers can claim the credit in 2020 and 2021

Employers can claim the ERC in the following ways:

  • By reducing payroll tax deposits for federal income tax withheld from employees, and the employer and employee portions of social security and Medicare taxes
  • Claiming the credit on Form 941
  • Filing Form 7200 for an advance on the credit
  • Retroactively for 2020 by filing an amended Form 941-X

It should be noted that the same wages cannot be used for the ERC and factored into the loan forgiveness calculation of PPP funding. It may be advisable to segregate wages that qualify for the ERC so that loan forgiveness is not affected.

As always, please do not hesitate to contact the HW partner or team member you work with for assistance or with any questions you may have.