Consolidated Appropriations Act Expands Employee Retention Credit (ERC)

What Is The Employee Retention Credit?

This ERC is explicitly meant to help employers that suffer financial losses, but still continue to pay workers who are unable to perform their duties. It, like other CARES Act measures, rewards employers that keep employees on the payroll roster. This credit is available for payroll from March 12 to December 31, 2020.

The retention credit is a tax credit — not a deferral — against federal employer taxes. This credit is measured quarterly. If the credit applies, taxes are completely waived.

The Infrastructure Investment and Jobs Act, enacted on November 15, 2021, amended section 3134 of the Internal Revenue Code to limit the Employee Retention Credit only to wages paid before October 1, 2021, unless the employer is a recovery startup business.

IRS issued guidance regarding the retroactive termination of the Employee Retention Credit.

ERC and PPP Loan Considerations

When the CARES Act was passed, it created both the SBA Employee Retention Credit (ERC) program and Paycheck Protection Program (PPP). They were mutually exclusive, but the Consolidated Appropriations Act (CAA), which was signed into law on December 27, 2020, significantly expanded the ERC and allows employers who borrowed PPP loan funds to take advantage of both programs.

There are several exciting developments regarding ERC which include, it’s refundable. That means you get a refund if the credit exceeds the amount of Social Security taxes withheld. It’s a dollar-for-dollar credit against employment tax. Businesses losing money may not owe much income tax, but they often employ people and incur payroll taxes. It’s instant cash relief. You can get the credit in advance of filing your quarterly payroll returns if you’re certain that you’ll qualify and the credits are big.

A close reading of these new provisions also reveals wages used for the ERC calculations take precedent over wages used in PPP math. That raises questions for taxpayers who have already filed for PPP forgiveness.

Claiming ERC

In order to claim the new Employee Retention Credit, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers, beginning with the second quarter. The credit is taken against the employer's share of Social Security tax but the excess is refundable under normal procedures.

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200. Taxpayers can file it more than once a quarter. However, the IRS has rejected many 7200s, and we do not always recommend an advance credit filing. Claim the credit on a Form 941, which is the federal quarterly payroll tax return. If filing after the due date, a 941-X can be filed to amend the return.

The following examples might help clarify (assuming either there is a government order or a drop in receipts to qualify):

1. A restaurant with 40 full-time staff in 2019 that is subject to a government order to partially suspend operations is eligible for the credit on all wages paid to staff, even if the staff are working and productive during the paid time. The potential credit for this small business is 40 x $5000 = $200,000 in 2020. It’s potentially 40 x $7000 x 3 = $840,000 in 2021(!).
2. A restaurant chain with more than 500 full-time workers can take the credit for staff who were paid only when they were not working, or for furloughed staff healthcare costs they continue to pay while those staff are not working. The credit doesn’t apply to wages paid to those who are working.
3. A restaurant continues to pay staff for 40 hours a week, though they only work for 20.
   1. If they have more than 500 (or 100 in 2020) workers, they can claim a credit for the 20 hours of paid, not working, time.
   2. If they have less than 500 (100 in 2020) staff, they can claim the credit for all 40 hours.

Pointers and Pitfalls

The following will help clarify or avoid pitfalls within the ERC regulations.

1. This most recent legislation allows an employer to take an ERC on the healthcare costs for a furloughed employee, even if they are not collecting wages.
2. There is complexity in defining “partial” business, or commercial, interruption.
3. Be careful. There’s room for interpretive trouble when it comes to counting full-time workers. Legislation refers to full-time staff and points to prior language indicating that full-time employees are those who worked 30 hours a week or more on average in 2019.
4. Zoom can rule out qualifying. If everyone goes home and promptly telecommutes, even if there’s a government stay-at-home order, the business has not been disrupted.
5. The CAA eliminated, at least for now, the requirement that eligible wages for an employee not be higher than they were in a prior quarter.
6. Owner wages, and any owner family wages, may have to be excluded in calculating eligible wages.
7. The ERC program was eliminated for the 4th quarter of 2021 to help fund Infrastructure legislation.

Recommendation

Approach the ERC process methodically, using a well-coordinated team comprised of HR, payroll and tax professionals.

We’re here to help! For questions or assistance with ERC, contact our tax credit experts.