Employee for the year 2021
The December Consolidated Appropriations Act of 2021 provided for retroactive applicability of the ERC for the year 2020, as well as for the extension and expansion of the ERC for the first two quarters of 2021, and it also liberalized the standards for the ERC for the year 2021. Importantly, it made it such that an employer who did not accept an ERC for 2020 because it or a controlled part of the employer acquired a PPP loan may now be eligible for ERCs for 2020. This was made possible by the legislation.
Since the American Rescue Plan Act was passed into law on March 11, eligibility for the ERC has been expanded to include all four quarters of 2021. The more recent Act extended the availability of the ERC to the third and fourth quarters of 2021, with each quarter having its own maximum amount of qualified wages and qualified health plan expenditures that cannot exceed $10,000 per employee. On the other hand, beginning with the third and continuing through the fourth quarter, the ERC will no longer be a credit against the Social Security tax; instead, it will be a credit against the tax paid to Medicare.
The more recent Act also added new ERC eligibility opportunities for 2021 Q3 and Q4 for “recovery startup businesses” and “severely financially distressed employers” – continue reading for more information on these categories – and extended the limitation period on ERC-related assessments from three years to five years from the date of filing the applicable Form 941. Read on for more information.
The term “qualifying employer” is defined here.
A contractor needs to meet the requirements of a “eligible employer” in order to be awarded an ERC. On an aggregated basis, the term “employer” refers to all members of a controlled group as defined by Internal Revenue Code Section 52 (for example, for a parent and subsidiaries, based on a higher than 50 percent ownership test) or Internal Revenue Code Section 414(m) (associated service group).
An “eligible employer” meets the following criteria:
A contractor who can, for the year 2020:
(1) The company completely or partially halted its activities as a result of a government order that restricted trade, travel, or group meetings because of COVID-19 (the employer is eligible to claim the ERC for the period during which the operations were suspended).
duration of the suspension term), or
(2) The company’s gross receipts for any quarter of 2020 were less than fifty percent of the company’s gross receipts for the same quarter in 2019. (Employer is eligible to claim the ERC for the quarter that had the decline in gross receipts and for the next following quarter; eligibility ends for the quarter after the quarter for which gross receipts return to greater than 80 percent of the gross receipts for the same quarter in 2019 (unless that quarter has its own greater-than-50 percent decline when compared to the same quarter in 2019).) For the year 2021, a prospective employer who:
(1) The employer either completely or partially suspends its activities as a result of a government order that restricts trade, travel, or group meetings as a result of COVID-19 (in this case, the employer is able to claim ERC for the duration of the suspension), or
(2) Has gross receipts for either the current quarter or the quarter immediately before it that are lower than eighty percent of its gross receipts for the same quarter in 2019
Amount of ERC available
A contractor is eligible to receive a credit equal to 50 percent of the first $10,000 of Qualified Wages paid per employee in the aggregate for all qualifying quarters during Q2, Q3, and/or Q4 of 2020 (for Q2, including March 13 – March 31, 2020). This credit can be used for any of the three qualifying quarters. For the entirety of the year 2020, the maximum ERC would be set at $5,000 per employee receiving qualified wages.
An employer is eligible to obtain a tax credit of 70 percent of the first $10,000 in qualified wages provided to an employee in any qualifying quarter during the year 2021. The maximum ERC for each of these quarters would be $7,000 per employee getting Qualified Wages, and the maximum ERC for the year 2021 would be $28,000 per employee receiving Qualified Wages.
The term “Qualified Wages”
There is a disparity between what “small” and “big” contractors consider to be “Qualified Wages.”
For small contractors, the total amount of wages paid to all employees for the applicable quarter, as well as the total amount of Qualified Health Plan Expenses paid for those employees.
Only wages paid to employees and qualified health plan expenses paid for employees during a period or periods in which the employees did not conduct services for the contractor. This rule applies only to large contractors.
The costs that a contractor pays or incurs in order to keep a group health plan running are considered “Qualified Health Plan Expenses.” These costs might be allocated to the contractor’s qualified wages. (This sum takes into account contributions paid by employees before taxes in addition to payments provided by employers.) Even if no wages are paid but health plan coverage is provided (for example, coverage is continued for furloughed employees), the expenses constitute Qualified Health Plan Expenses and, as such, are eligible for ERC reimbursement. One example of this scenario is when coverage is continued for furloughed employees.
The following are the definitions for “small” and “big” contractors that apply in 2020 and 2021, respectively:
Independent Service Provider:
For the second, third, and fourth quarters of 2020 (for the second quarter, includes March 13 – March 31, 2020): As of 2019, had an annual average of one hundred or fewer “full-time employees” (average of 30 hours per week or 130 hours per month).
For the year 2019, there were 500 or less full-time employees on average for the company.
Large Contractor:
For the second, third, and fourth quarters of 2020 (for the second quarter, includes March 13 – March 31, 2020): Throughout the year 2019, averaged an average of more than 100 full-time employees.
For 2021: For 2019, the average number of full-time employees was greater than 500.
The Internal Revenue Service confirmed at the beginning of March that the “full-time employee” test does not take part-time employees into consideration. As a result, the only employees that will be counted are the ones who, with regard to any calendar month in 2019, had an average of at least 30 hours of service per week or had 130 hours of service in the month. This means that the only employees who will be counted are the ones who had an average of at least 30 hours of service per week or had 130 hours of service Employers who have a large number of part-time employees and who, as a result, would be considered “large employers” if those workers were counted, but who are now considered “small employers” as a result of not counting those workers will be able to claim ERCs that are significantly higher than those claimed by “large employers.”
Additional Economic Recovery Corporation possibilities for the third and fourth quarters of 2021: severely financially distressed employers and recovery starting enterprises
An alternate eligibility criteria was introduced by the American Rescue and Reinvestment Plan Act for the third and fourth quarters of 2021 only. This standard applies if the employer is a “recovery starting business,” which is described as follows: • The employer did not begin operating any kind of commercial enterprise until after February 15, 2020, and
2020 ERC DECISION TREE
The Employee Retention Credit (ERC) will provide relief in the form of a fully refundable federal payroll tax credit in the year 2020 for eligible employers who may be adversely affected by COVID-19. You may evaluate both your eligibility and the amount of credit that you could be eligible for by using the decision tree that is provided below. (It is subject to take note that these credits are now accessible to employers that have been granted loans via the Paycheck Protection Program (PPP), but with some limitations.) Read the whole article (located at www.cohnreznick.com/insights/employee-retention-credit-nowavailable-to-ppp-recipients) for further information or to find out if you are eligible for the ERC in 2021.
*It is not possible to utilize the same wages to qualify for ERC Qualified Wages and to get PPP loan forgiveness at the same time.
2021 ERC DECISION TREE
The Employee Retention Credit (ERC) provided relief to eligible employers in the form of a fully refundable federal payroll tax credit in the year 2020. This relief was supplied to businesses who were adversely affected by the COVID-19. It was later extended to include all four quarters of 2021, but with some modifications. The most subject of these modifications is that loan beneficiaries of the Paycheck Protection Program (PPP) are now eligible to claim these credits, albeit with certain limitations. You may evaluate both your eligibility and the amount of credit that you could be eligible for by using the decision tree that is provided below. Read the whole article (located at www.cohnreznick.com/insights/employee-retention-credit-now-available-to-ppp-recipients) for further information or to find out if you are eligible for the ERC in 2020.
It is not possible to count the same wages toward both the Earned Revenue Credit Qualified Wages and the PPP Loan Forgiveness requirements at the same time.
* Note that additional ERC eligibility chances have been added for “recovery starting enterprises” and “severely financially distressed employers” just for Q3 and Q4; for details, check our entire post. These opportunities are only available during these two quarters.