The Employee Retention Credit was introduced in the CARES Act. Congress subsequently amended and expanded the tax credit to increase the number of companies that could qualify. Now most employers who have had a significant decline in business due to the pandemic qualify for the credit.

Among other things, recent legislation extended the expiration date and increased the amount of the credit. Where the credit was equal to 50% of up to $10,000 in wages paid between March 12, 2020, and Jan. 1, 2021, the American Rescue Plan Act of 2021 increased the credit to 70% of qualified wages up to a $10,000 limit per quarter. This means that a maximum of $7,000 per employee per quarter for a total of $28,000 can be claimed by qualified employers in 2021. Add the potential of receiving $5,000 in ERC from 2020, and the full amount could equal $33,000 per employee. A contractor with 25 employees could realize $825,000 in savings from ERC.

The proposed infrastructure bill would end ERC on Sept. 30, 2021, instead of Dec. 31, 2021. The potential ERC a company could take would be reduced under the infrastructure bill to $21,000 per employee. Startup recovery businesses, which include any company that began operations after Feb. 15, 2020, and has average annual gross receipts of $1 million or less would remain eligible for the credit through the end of 2021. These businesses are subject to a quarterly ERC cap of $50,000.

Employers can generally include certain federal income tax withholding, the employees' share of Social Security and Medicare taxes, and the employer's share of Social Security and Medicare taxes for all employees, up to the amount of the credit. Certain health insurance costs are also eligible.

Eligible Employers

Most employers who have had a significant decline in business due to the pandemic qualify for the credit. This includes colleges, universities, hospitals and 501(c) organizations under a ARPA provision and eligible recovery startup businesses.

The Consolidated Appropriations Act expanded ERC eligibility to include businesses who took a loan under the Paycheck Protection Program, including borrowers from the initial round of PPP who originally were ineligible to claim the tax credit.

Qualification is determined by one of the following:

1. A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
2. An employer that has a significant decline in gross receipts during the quarter compared to the same quarter in 2019.

According to the IRS, a significant decline in gross receipts begins on the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends on the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than of 80% of its gross receipts for the same calendar quarter in 2019. Employers qualify in 2021 if their gross receipts fell by more than 20% in a quarter relative to the same period in 2019.

Qualified Wages

There is no size limit on eligibility for the ERC. For employers with 100 or fewer employees (on average in 2019), the credit is based on wages paid to all employees whether they worked or not. Employers can take the credit for employees who were paid for full-time work. For employers with more than 100 employees (on average in 2019), the credit is allowed only for wages paid to employees who did not work during the calendar quarter. A CAA provision increased the employee limit to 500 for determining which wages are applicable for the credit.

Only wages up to the amount that the employee would have otherwise been paid during the 30 days prior to the COVID-19 related hardship can be included. Other rules apply.

Claiming the Credit

Eligible employers can report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns (generally, Form 941, Employer's Quarterly Federal Tax Return) for the applicable period. If a reduction in the employer's employment tax deposits is not sufficient to cover the credit, certain employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. Eligible businesses can file retroactive claims for wages paid in prior tax quarters.

Although the program is set to sunset at the end of 2021, the credit can be claimed on amended payroll tax returns as long as the statute of limitations remains open. This is typically three years from the date of filing.

Taking advantage of ERC could make a sizable difference in the cash available to operate a business and help to improve cashflow. For many contractors, this could mean the difference between staying in business or not.