On March 11, 2021, President Joe Biden signed into law the American Rescue Plan Act of 2021 (the “ARPA”), considered to be one of the largest economic rescue packages in US history.  The ARPA addresses the ongoing economic challenges facing employers and employees caused by the COVID-19 pandemic.  One of the more important provisions for a small employer in the ARPA is the extension of the Employee Retention Credit (the “ERC”).

BACKGROUND

CARES Act. The ERC was first introduced in the CARES Act in March 2020 when COVID-19 began.  The ERC was designed to encourage businesses to keep employees on their payroll by providing a refundable tax credit equal to 50% of qualified wages (including certain health plan expenses), up to a maximum of $10,000 per employee.  This credit was available for wages paid after March 12, 2020, but before January 1, 2021.  An employer was eligible for the tax credit if in 2020 it experienced:

• full or partial suspension of its business because of a government order due to COVID-19 during a calendar quarter; or
• significant decline of gross receipts by 50% or more compared to the same quarter in 2019.

The definition of qualified wages changed depending on the number of employees.  If an employer averaged 100 or more full-time employees in 2019, then it could only claim the tax credit on wages paid to employees who are not providing services.  A smaller employer, on the other hand, could claim the credit for all wages paid to its employees, whether or not the employees were providing services.

Under the CARES Act, an employer that received a PPP loan at any time could not claim the ERC.  However, this rule was changed by the Taxpayer Certainty and Disaster Tax Relief Act of 2020.  Under this Act, an employer that received a PPP loan is allowed to claim the ERC for qualified wages that are not counted as payroll costs for PPP loan forgiveness.

CAA.  In December 2020, the Consolidated Appropriation Act of 2021 (the “CAA”) extended the ERC to June 30, 2021.  The CAA also expanded the tax credit from 50% to 70% of qualified wages and expanded the definition of eligible employers to allow more employers to qualify.  CAA expanded the eligibility by:

• reducing the gross receipts reduction requirement from 50% to 20%;
• increasing the qualifying wage limit from $10,000 per employee, to $10,000 per quarter, per employee; and
• increasing the 100 full-time employee limit in the qualified wages definition to 500 full-time employees.

As a result, an employer with less than 500 full-time employees would be eligible to claim the ERC for qualified wages paid to their employees, even if these employees provided services. 

NEW UNDER ARPA

The ARPA further extends the ERC from June 20, 2021, until the end of 2021.  The ARPA follows the expanded eligibility requirements under the CAA but the tax credit may only be claimed against Medicare (1.45%, Hospital Insurance) taxes only.  Under the CARES Act and CAA, the credit could be claimed against Social Security (6.2%, OASDI) taxes.

The ERC is also limited to $50,000 per quarter for an eligible employer that is a recovery startup business.  A recovery startup business generally means any employer, which began its business after February 15, 2020, with annual gross receipts that average less than $1.0M, and experienced either a full (or partial) suspension of its business because of a government order due to COVID-19 or a significant decline in gross receipts.

ARPA makes clear that qualified wages for purposes of ERC do not include wages taken into account as payroll costs under:

• PPP loans including second draw PPP loans;
• shuttered venues operators grants, and
• restaurant revitalization grants.

However, the ARPA does allow employers that opened new businesses after 2019 to look to 2020 wages to determine qualified wages.  

Clearly, the ERC can greatly benefit small employers by providing much-needed funds to help them pull through the COVID-19 pandemic.  However, the eligibility rules and the calculation of the ERC amount can be complicated.  As a result, employers should reach out to their tax advisors now to see if they are eligible and start claiming these tax credits.

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