Not long after the initial onset of the COVID-19 pandemic in March of 2020, the federal government responded by creating legislation to address a myriad of issues the pandemic would (and has continued to) bring to American employers, small businesses, and industries known as the Coronavirus Response and Consolidated Appropriations (CARES) Act.
Implementing this act allowed for the federal government to enact a number of programs to help mitigate the financial impact of the pandemic on American businesses, such as Paycheck Protection Program (PPP) loans, though this program and its related benefits to employers concluded earlier this year in May of 2021. According to the Small Business Association (SBA), PPP loans allowed for employers to receive a fully refundable tax credit for the amount of the PPP loan they received, so long as “employee and compensation levels [were] maintained,” and no less than 60% of the total loan amount went towards covering payroll costs for eligible employers during the height of the pandemic.
A second program under the CARES Act—the Employee Retention Credit (ERC)—was similarly enacted to grant a refundable credit against certain employment taxes to employers, according to the IRS, “equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021.” Recently, however, a number of changes and/or extensions have been made to this credit from the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted on December 27, 2020, which include an extension of the ERC through June 30, 2021.
“Part of this new legislation allows eligible employers to claim a refundable credit against the share of Social Security tax equal to up to 70% of wages paid to employees after December 30, 2020 and before July 1, 2021,” said Emily Meyer, Director of Operations for G.I. Tax. “Because qualified wages are limited to $10,000 per employee per 2021 calendar quarter, this means the maximum tax credit amount available to employers is $7,000 per employee per 2021 calendar quarter, equating to a total of $14,000 in available credit per employee in 2021.”
This extension is in addition to (rather than in lieu of) previous legislation for the ERC in 2020, which operated in a similar fashion, albeit for a refundable credit equal to 50% of qualified wages paid to employees between March 13 and December 31, 2020. As for the IRS’s definition of what constitutes “qualified wages,” Meyer of G.I. Tax had this to say.
“The definition of ‘qualified wages’ varies only between employers with 100 and more, or 100 and fewer employees during the periods of eligibility in 2019,” Meyer added. “For instance, for the former, qualified wages would constitute as wages including healthcare costs up to $10,000 per employee paid to those employees who were not providing their standard services for their employer due to business operations being suspended or a decline in the business’s gross receipts. For the latter,” Meyer continues, “the same rules and regulations apply; however, for employers with 100 or fewer employees, it does not matter whether or not those employees were continuing to provide their standard services for their employer or not.”
Under initial legislation for the ERC, employers which applied for and received a PPP loan were originally not eligible to receive additional tax credits under the ERC program of the CARES Act. This, however, changed when the IRS announced the ERC’s extension on January 26, 2021, citing that its extension would likewise retroactively, “…[allow] employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.”
Regarding this recent extension of the ERC and its eligibility benefits of qualified wages to employers, the total amount of employees a business can have to remain eligible for the credit has increased to employers with 500 or more, or 500 and fewer full-time employees, respectively.
“If an employer’s business did not exist in 2019 to reap the initial benefits of ERC eligibility,” says Meter, “that employer may likewise use the same corresponding 2020 quarter decline in gross receipts instead. Because the IRS plans to release future guidance pertaining to the first two calendar quarters of 2021 for employers to measure the decline in their gross receipts using the preceding quarter in comparison to that of the same quarter in 2019, employers may elect to do so once that guidance is released later this year.”
Overall, as Meyer mentions, the ERC presents a unique opportunity for business owners and employers to receive additional tax credits this upcoming tax season for continuing to persevere in spite of the hardships caused by the lingering fallout of the COVID-19 pandemic. If you’re interested in learning more about how you can best utilize the ERC and its benefits for your business, contact a tax professional such as Meyer or any of the other seasoned tax professionals at G.I. Tax throughout the United States.
