The coronavirus relief bill signed into law in December 2020 included an extension of the Employee Retention Credit under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. Understanding its eligibility, optimizing the benefits and documentation are all critical for businesses today.
The ERC is a refundable payroll tax credit that runs from March 13, 2020, to June 30, 2021. It’s available to eligible employers with qualified wages paid during quarters in which the employer is fully or partially closed by governmental order or had a reduction in gross receipts greater than 50% for 2020, or 20% for 2021 as compared with the same quarter in 2019. Employers with eligible wages in 2021 are entitled to a credit of 70% on the first $10,000 of qualified wages per quarter for each employee, up to $7,000 per quarter. Employers with eligible wages in 2020 are entitled to a credit of 50% on the first $10,000 of qualified wages in 2020.
Top considerations to maximize ERC benefits.
Eligibility criteria differ for 2020 and 2021 and include certain employee headcount thresholds, and you must have experienced certain reductions in gross receipts or have been fully or partially shut down by governmental order.
Large Employer threshold increased from 100 to 500 for 2021
To be eligible in 2021, employers must have a decline in gross receipts of at least 20% or be fully or partially shut down by the government. Eligible employers in 2021 with 500 or fewer employees can qualify all wages paid, while wages paid to employees not performing services are eligible for employers with more than 500 employers. This increase in the employee threshold expands the wages to be included in the ERC.
If the business has more than 500 full-time employees, qualifying wages are only wages paid to employees not to work.
Maximizing PPP and ERC
The new tax law presents an opportunity to stack the Paycheck Protection Program and ERC to maximize available relief. Businesses who have not applied for PPP forgiveness can reduce payroll costs to 60%, maximize 40% non-payroll costs claimed for PPP and utilize additional wages towards ERC. Employers need to carefully evaluate ERC, PPP and sick pay credits received under the Families First Coronavirus Response Act to ensure eligible wages are not double or triple counted. Documentation is critical in the event of a future IRS or SBA audit.
ERC affiliation rules
When determining eligibility, businesses need to consider the requirements of what constitutes a single employer under Section 52(a) and Section 414(m) or (o) of the IRS code.
The affiliation rules for the ERC are different from the PPP. ERC relies on the IRS concept of a controlled group for affiliation in determining the number of employees and gross receipts reductions.
Affiliation rules consider ownership structures, parent-subsidiary, brother-sister controlled group and common management.
If you need assistance with your ERCs, contact us here and a member of our team will be in touch.
Sofia Cordero is a manager with Mazars USA LLP.