On December 27, 2020, Congress enacted the Taxpayer Certainty and Disaster Tax Relief Act of 2020. The bill made retroactive changes to the original Employee Retention Credit (“ERC”) that applied to wages paid or incurred between March 13, 2020 to December 31, 2020 and extended the ERC to include qualified wages paid from January 1, 2021 through June 30, 2021. Restaurants, theaters, retail stores, and other businesses that provide personal services that require close contact with customers are the prime target for the ERC.

CLAIMING THE ERC IN 2020

What is the ERC in 2020?

Claiming the ERC in 2020 has different eligibility criteria than it does for 2021. The ERC in 2020 is a refundable tax credit against employment taxes. The credit equals 50% of the qualified wages paid to employees from March 13, 2020 to December 31, 2020. The limit on qualified wages is $10,000 per employee.

Who Qualifies for the ERC in 2020?

Employers are eligible for the ERC for qualified wages paid between March 13, 2020 and December 31, 2020 if:

  •  The employer experienced a full or partial suspension of their operations during any calendar quarter due  to governmental orders that restricted commerce, group meetings, or travel in response to COVID-19; or
  •  The employer experienced a significant decline in gross receipts.  A significant decline in gross receipts begins on the first calendar quarter of 2020 that an employer’s gross receipts declined by 50% or more compared to the same calendar quarter in 2019.  The significant decline in gross receipts ends on the first calendar quarter wherein the employer’s  gross receipts rise above 80% of the gross receipts of the same calendar quarter in 2019.

The ERC in 2020 applies to qualified wages paid during the period of significant decline or any calendar quarter in which operations were suspended.

What are Qualified Wages in 2020?

Qualified wages for employers of more than 100 full-time employees are: wages of up to $10,000 per employee paid to employees that were not providing services because of suspended operations or in response to the decline in gross receipts. Certain health care costs are considered qualified wages. Employers may only claim the ERC for wages paid up to the amount that the employee would have received over an equivalent period prior to the suspended operations or decline in gross receipts.

Qualified wages for employers of 100 or less full-time employees are: wages of up to $10,000 per employee, including health care costs, paid to employees during the period of suspended operations or the significant decline in receipts. The employees’ wages can be claimed as qualified wages even if the employee is paid for providing services.

Impact of Other COVID-19 Relief or Other Tax Credits

Employers may not claim the ERC for:

  • Wages for which the employer claimed and received a tax credit for paid sick and family leave.
  • Wages paid to employees that could claim a Work Opportunity Tax Credit.
  • Wages claimed as wages paid for payroll costs on an accepted Payroll Protection Program forgiveness application.

CLAIMING THE ERC IN 2021

What is the ERC as of January 1, 2021?

The 2021 ERC is a refundable tax credit against the employer’s share of Social Security tax. The credit equals 70% of the employer’s qualified wages paid to employees from January 1, 2021 to June 30, 2021. The ERC is limited to qualified wages up to $10,000 per employee per quarter resulting in a tax credit of $7,000 per employee per quarter. The ERC can provide employers refundable credits of up to $14,000 per employee in 2021.

Who Qualifies for the ERC as of January 1, 2021?

Employers are eligible to claim the ERC if they operate between January 1, 2021 and June 30, 2021, and meet the one of the following criteria:

  • The employer experienced full or partial suspension of operations during this period due to governmental orders limiting commerce, travel, or group meetings in response to COVID-19; or
  • The employer’s gross receipts declined more than 20% in a calendar quarter of 2021 compared to the gross receipts of the same calendar quarter in 2019. If the employer did not exist in 2019, then a calendar quarter from 2020 can be used to calculate the decline of gross receipts.
What Are Qualified Wages as of January 1, 2021?

Qualified wages for employers of more than 500 full-time employees are: wages that are paid to employees that are not providing services due to partially or fully suspended operations or due to the decline in gross receipts.

Qualified wages for employers of 500 or fewer full-time employees are: all wages paid during the period that operations were fully or partially suspended or during the quarter in which the employer suffered a decline in gross receipts of at least 20%.

This article is not legal advice. If you want to know if your business qualifies for the ERC or want information on the process for claiming the ERC, please reach out to Kennedy & Ruhsam Law Attorney Sam Chapin at 651-262-2083 or via email at sam.chapin@mpkennedylaw.com.

Attorney Sam Chapin