On March 1, the IRS issued guidance for employers claiming the employee retention credit (ERC) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The ERC is designed to help eligible businesses keep employees on their payroll by offering a credit against employment taxes when qualified wages and healthcare expenses are paid during the COVID-19 pandemic. Below are the most frequently asked questions regarding the ERC guidance.
Q: How does a business qualify for the ERC?
A: For 2020, businesses with operations that were either fully or partially suspended by a COVID-19 governmental order OR gross receipts less than 50% of gross receipts for the same quarter in 2019 qualify for the credit. For 2021, a business must have operations that are either fully or partially suspended by a COVID-19 governmental order OR gross receipts less than 80% of gross receipts for the same quarter in 2019 to qualify for the credit.
Q: What percentage of an employee’s wages qualify?
A: For 2020, 50% of qualified wages. For 2021, 70% of qualified wages.
Q: What is the maximum credit per employee?
A: For 2020, a maximum $5,000 annual credit per employee. For 2021, $7,000 per employee for each of the first two quarters of 2021 for a maximum $14,000 annual credit per employee.
Q: How many employees must a business have to qualify?
A: For 2020, 100 or less full-time equivalent employees. For 2021, 500 or less full-time equivalent employees. Employers exceeding these limits are still eligible but only wages and health care paid to employees for periods which the employee was not working would qualify.
Q: Is a business qualified if they received a Paycheck Protection Program loan?
A: For 2020, a company that received a PPP loan was ineligible to claim the credit. This restriction was eliminated by updated legislation. A company that received or receives a PPP loan is no longer prohibited from claiming the ERC. However, the credit cannot be claimed for wages paid with the proceeds of a forgiven PPP loan.
Q: What new entities qualify for the ERC?
A: The ERC is now available to public colleges or universities, organizations whose principal purpose is providing medical or hospital care, and certain federal instrumentalities, such as federal credit unions. In the original legislation, the credit was not available to any federal, state, or local governments.
Q: What if the business was not in operation in 2019?
A: Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in gross receipts.
Q: Can a business retroactively claim the ERC for 2020?
A: The latest bill permits an eligible employer to claim the ERC retroactively, for qualifying wages paid after March 12, 2020. Qualifying employers should amend applicable employment tax returns to claim the ERC and request a refund. The deadline for filing an amended employment tax return is generally three years from the original due date.
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These FAQs and the related webinar materials are provided for general information purposes only and do not constitute legal or professional advice. No user should act on the basis of any material contained in the FAQs without obtaining proper legal or other professional advice specific to their situation.