CARES ACT Employee Retention Tax Credit
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020, to address the negative economic impact of the COVID-19 pandemic. Within the CARES Act, Congress created the Employee Retention Credit (“ERC”), a fully refundable payroll tax credit, to provide aid to employers impacted by the COVID-19 pandemic.
As originally passed, the ERC was available to eligible employers from March 13, 2020, to December 31, 2020, and was equal to 50% of up to $10,000 in qualified wages paid to an employee during the year—a credit opportunity of up to $5,000 per employee for the 2020 tax year. Subsequent legislation (the Consolidated Appropriations Act, the American Rescue Plan Act, and the Infrastructure Bill) was enacted to address the continued economic impact of the COVID-19 pandemic which included certain enhancements and amendments to the ERC. Among the enhancements were:
- an extension of the ERC through September 30, 2021; and
- an increase of the ERC to 70% of up to $10,000 in qualified wages paid to an employee per quarter—an increase in the credit opportunity to $7,000 per employee per quarter for the 2021 tax year.
Eligibility for the ERC is evaluated on a quarterly basis and is based on each employer’s specific facts and circumstances. An employer is eligible for the ERC if it experienced either:
- a full or partial suspension of business operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- a significant decline in gross receipts (50% decline in gross receipts in 2020 compared to the same quarter in 2019; 20% decline in gross receipts in 2021 compared to the same quarter in 2019).
Subject to certain limitations, PPP recipients and certain instrumentalities of the government are generally permitted to claim the ERC if they meet one of the above eligibility tests.
Employers who are eligible for the ERC in a given quarter may qualify for 50% of up to $10,000 in qualified wages in 2020 per employee for the year, and 70% of up to $10,000 in qualified wages per employee, per quarter in 2021. The total potential ERC for an employer is $26,000 per employee.
The wages that may qualify for the ERC (the “Qualified Wages”) varies depending on an employer’s average full-time headcount in 2019. A “small” employer’s Qualified Wages during an eligible quarter may include all wages paid and employer paid qualified health plan costs. Qualified Wages for a “large” employer during an eligible quarter are wages paid not in exchange for a service and an allocable portion of employer paid qualified health plan costs.
A “small” employer is defined in 2020 as an average of 100 or less full-time employees in 2019, and an average of 500 or less full-time employees in 2019 for the 2021 credit. A “large” employer is defined in 2020 as an employer with an average of more than 100 full-time employees during 2019, and an average of more than 500 full-time employees in 2019 for the 2021 credit.
The ERC can be monetized by completing an IRS Form 941-X and requesting a refund from the IRS.