The Complex Rules Behind the ERC

The COVID-19 pandemic created unprecedented problems for businesses that were required to shut down or limit operations. The government responded by enacting the Coronavirus Aid, Relief, and Economic Security Act, which created the Paycheck Protection Program and the Employee Retention Credit. ​

These two programs were intended to help these businesses retain their employees and pay their bills during the pandemic. This article discusses the ERC, which is complicated by the changes that have been enacted by subsequent legislation. These changes, as described below, affect who can claim the credit, when they can claim it, and the amount of money people are eligible to claim.  

The ERC under the CARES Act
The CARES Act allowed qualified employers to claim a credit of 50% on employees’ qualified wages, including the employer portion of group health care costs. These wages had to have been paid between March 13, 2020, and December 31, 2020. For 2020, the maximum eligible wages per employee was capped at $10,000. That is the same as up to $5,000 per employee or 50% of $10,000 worth of qualified wages.

To qualify for the credit, (1) the employer must have carried on a trade or business during the 2020 calendar year and (2) that business must have (a) been fully or partially shut down by the government due to COVID-19 or (b) had gross receipts for at least one calendar quarter that were less than 50% of the gross receipts received during the same calendar quarter or quarters in 2019. 

Additionally, employers with over 100 full-time employees could only claim the credit for wages paid to employees who were not working. The 100-employee threshold is based on the average number of employees during 2019.

The ERC under the CAA
The Consolidated Appropriations Act allowed eligible employers to retroactively claim the ERC on 2020 wages as long as they (1) did not claim the ERC and PPP loan forgiveness on the same wages and (2) apply eligible wages first to the ERC and then to PPP loan forgiveness. It also extended the credit to June 30, 2021.

The CAA also created two additional categories of employers: 

• Severely financially distressed employers, including employers who experienced a decline in gross receipts that was greater than 90% in the 2021 quarter compared to the same quarter in 2019, can include all employee wages when calculating the ERC.
• Recovery startup businesses, like trades or businesses that began operating after February 15, 2020, became eligible to receive up to $50,000 per quarter.

The ERC under the ARP
The American Rescue Plan extended the ERC from June 30, 2021, to December 31, 2021. It also restructured the credit so that it can be claimed against the employer's share of Medicare for the second half of 2021 rather than against Social Security taxes like it was during prior periods. Among other changes, the ARP also made the following adjustments:

• Increased the credit percentage from 50% to 70% of qualified wages for 2021
  • $10,000 qualified wages x 70% rate = $7,000
• Changed how the qualified wage caps were calculated 
  • From $10,000 per year to $10,000 per quarter
• Permitted eligible employers with a reduction in gross receipts of 20% in 2021 to take advantage of the ERC
• Increased the threshold of 100 full-time-equivalent employees to 500 FTE employees for the period

The ERC under the Infrastructure Investment and Jobs Act 
The Infrastructure Investment and Jobs Act changed the date through which the ERC could be claimed from December 31, 2021, to September 30, 2021, for most businesses. Only recovery startup businesses can claim the ERC through December 31, 2021.

Claiming the ERC
Eligible employers can claim the credit by computing the ERC amount for a pay period and decreasing the required payroll deposit by that amount.

Small employers — which are classified as those with fewer than 500 FTE employees in 2021 and fewer than 100 employees in 2020 — can request an advance of the ERC by filing Form 7200. Advance payments may not exceed 70% of the average quarterly wages paid by the employer in the calendar year 2019 or 50% in 2020. Employers that were not in existence in 2019 can use the average quarterly wages paid during the 2020 calendar year.

Advance ERC must be reconciled against the actual ERC at the end of the applicable quarter. Any excess taxes that are paid will be treated as refundable overpayments.

Claiming both the ERC and PPP loan forgiveness
Understanding which provisions apply and which periods they apply to is complicated enough, but it becomes even more difficult for businesses seeking to maximize the benefits of the ERC and PPP loan forgiveness to comprehend.  

For example, the time at which the application for PPP loan forgiveness is filed can affect the business's taxes overall. A recent revenue procedure provides alternatives for when tax-exempt income from PPP loan forgiveness can be treated as received or accrued. New guidance may still be issued, though it depends.
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Consulting a tax professional is the best way for businesses to maximize the benefits available to them under these programs.