The Employee Retention Credit (ERC) was initially introduced in March 2020 under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to encourage employers to keep employees on their payroll. The Consolidated Appropriations Act, 2021 (CAA) modified the ERC in December 2020 to make this refundable tax credit more accessible. The American Rescue Plan Act of 2021 (ARPA), a $1.9 trillion stimulus package, was signed into law on March 11, 2021, further expanding the ERC.
What are key changes?
The modifications under the ARPA are effective after June 30, 2021. Some of the notable changes include the following:
- Credit extension: The ERC was originally available through December 31, 2020 under the CARES Act, and previously extended through June 30, 2021 by the CAA. The ARPA further extends the ERC through the end of 2021.
- Maximum credit: Under the ARPA, the maximum credit in 2021 for an eligible employer is $28,000 per employee, increased from $14,000 under the CAA. This is a significant increase from 2020, for which the maximum credit per employee was $5,000. For 2021, the credit is calculated at 70% of qualified wages up to $10,000 for each applicable quarter per employee. For 2020, it is calculated at 50% of qualified wages up to $10,000 for all applicable quarters per employee. Qualified wages include the cost of employer provided healthcare.
- Eligibility: Under the CAA, the required decline in gross receipts to be eligible for the ERC, compared to the same calendar quarter in 2019, is reduced to 20% from 50% for 2021. Alternatively, employers become eligible if their operation is fully or partially suspended by a governmental order related to COVID-19.
The ARPA adds another eligibility category for recovery startup businesses. They are defined as businesses established after February 15, 2020, with average annual gross receipts not exceeding $1 million and otherwise not eligible for the credit. The ERC is limited to $50,000 per applicable quarter per employer for this category.
- Qualified wages and employer size: Under the CARES Act, for employers who had more than 100 full-time employees on average in 2019, qualified wages are the wages paid to employees for the time that they are not providing services. The CAA previously increased the cap of the employee numbers to 500 for 2021. Essentially, if an employer had an average of 500 or fewer full-time employees during 2019, qualified wages are the wages paid to their employees, regardless of whether or not employees are providing services.
The ARPA further defines severely financially distressed employers as those experiencing a gross receipt decline of over 90%. For these employers, qualified wages are the wages paid, regardless of the number of employees.
- Applicable employment taxes: The ARPA modified the ERC to be claimed against the employer portion of Medicare taxes, rather than social security taxes.
- Paycheck Protection Program (PPP) loans: Under the CARES Act, the ERC could not be claimed if receiving a loan under the PPP through the Small Business Administration. This was retroactively modified under the CAA allowing qualified PPP loan recipients to claim the ERC for wages that are not part of PPP loan forgiveness.
How we can help
Duff & Phelps' Site Selection and Incentives Advisory team can provide guidance on eligible businesses, qualified wages, credit value as well as how to claim the credit or assistance with other technical matters.