The Employee Retention Tax Credit is one of our Employer Incentives. The most current version of the tax credit was signed into law as a result of the COVID-19 crisis with the CARES Act in 2020.  It was then updated by the CAA and then again by ARPA.  However, there is a previous version of the Employee Retention Tax Credit that focuses on Disaster Relief. To clarify the differences between the two, we call the current version COVID ERC or C-ERC and the previous version Disaster ERC or D-ERC. 

COVID-ERC

The Coronavirus Aid, Relief, and Economic Security (CARES) Act created a new employee retention tax credit for employers who closed, partially or fully, and experienced significant revenue losses resulting from COVID-19. The purpose of the tax credit is to keep workers on the payroll during the pandemic. The Employee Retention Tax Credit is an offset to payroll taxes, not an income tax credit. The original credit began March 12, 2020, and its original expiration date was the end of 2020. The Consolidated Appropriations Act of 2021 extended ERC through the first half of 2021, and then the American Rescue Plan (ARPA) extended it through the end of 2021.


Who Is Eligible 2020:

Private employers, including non-profits, carrying on a trade or business in 2020 that:

  • Have operations partially or fully suspended as a result of orders from a governmental authority due to COVID-19, or
  • Experience a decline in gross receipts by more than 50% in a quarter compared to the same quarter in the prior year 


Who Is Eligible 2021:

Private employers, including non-profits, carrying on a trade or business in 2020 or 2021 that:

  • Have operations partially or fully suspended as a result of orders from a governmental authority due to COVID-19, or
  • Experience a decline in gross receipts by more than 20% in a quarter compared to previous alternative quarters in 2020 or 2019


How Much Is The Tax Credit?

C-ERC is a 70% tax credit for the first $10,000 of earnings paid each quarter between January 1, 2021, and December 31, 2021, per eligible employee. This amount can include the employer portion of health benefits. Basically, for every eligible employee during this period, an employer would receive a $7,000 tax credit per quarter, totaling $28,000 for 2021. 


Additionally, an employer can claim a 50% tax credit for the first $10,000 of earnings paid to an employee between March 12, 2020, and December 31, 2020. Claiming both 2020 and 2021 ERC would maximize the C-ERC for an employer at $33,000 per eligible employee.


How Is The Credit Taken?

The COVID ERC is applied against the employer portion of payroll taxes. The ERC is "fully refundable" because if the credit exceeds the employer's share of payroll taxes, then the excess is treated as an overpayment and refunded to the employer. 


The tax credit is claimed on the employer's quarterly return Form 941.


Can an employer take both PPP and ERC?

As of December 21, 2020, and the passing of the Consolidated Appropriations Act of 2021, employers can take both PPP and ERC. Congress will allow employers to claim both, but not for the same dollars of payroll costs. The tax credits can be stacked for the highest benefit to the employer.


Key Takeaways

  • ERC provides a refundable credit of up to $5,000 per eligible employee between March 12, 2020 - December 31, 2020
  • ERC provides a refundable credit of up to $28,000 per qualified employee between January 1, 2021 - December 31, 2021
  • You qualify if you were full or partially impacted or if your gross receipts fell below 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021)
  • If you were not in business in 2019, you can use the corresponding quarters from 2020
  • You can claim your credit immediately by reducing payroll taxes sent to the IRS
  • If your credit exceeds payroll taxes, you will be refunded the difference from the IRS
  • If you received the Paycheck Protection Program (PPP) loan, you can still claim ERC for qualified wages not treated as payroll costs in obtaining forgiveness for the PPP loan


DISASTER-ERC

The Further Consolidated Appropriations Act, signed on December 20, 2019, included an extension to the existing Employee Retention Credit for employers affected by qualified disasters during 2018 and 2019. ERC or ERTC is a tax credit that has been around for years, specifically focused on disaster areas.


Who Is Eligible?

Employers who operated in a qualified disaster zone and became inoperable due to the disaster continued to pay or incur wages for eligible employees. Currently (as of June 2, 2020), these areas were predefined by President Trump and included 282 counties in the following states:


Alabama, Alaska, Arkansas, California, Florida, Georgia, Hawaii, Indiana, Iowa, Mississippi, Missouri, Nebraska, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, and Wisconsin.


How Much Is The Tax Credit?

D-ERC is a 40% tax credit for up to $6,000 of earnings paid to each eligible employee (making the maximum credit $2,400 per eligible employee). 


How Is The Credit Taken?

The Disaster ERC is a Federal income tax credit and should be filed with the employer's tax return.


Summary

Most clients want to know "what do I qualify for." Legislation related to Hiring Incentives is constantly changing due to the COVID-19 crisis. We stay informed and educated about these constant changes and ensure that our clients get the highest tax incentives possible. The quickest way to know what you or your client would qualify for is to send the client to your GMG.Me page. See here: How Does My Client Get Signed Up for ERC?