News & Articles

The Evolution of the Employee Retention Credit

Posted on Fri, Mar 26, 2021

The pandemic has adversely affected many sectors of the U.S. economy, causing widespread job losses. At the start of the national emergency, Congress created a novel tax break — the Employee Retention Credit (ERC) — to entice employers to retain employees. But three different laws have created and changed the credit, which has led to significant confusion. Here's a summary of how the ERC has evolved over the last year from the CARES Act to the American Rescue Plan Act (ARPA).

New Tax Break under the CARES Act

The CARES Act, which was enacted in March 2020, introduced the ERC for employers that kept workers on their payrolls. It was designed to help curb layoffs during the COVID-19 pandemic.

Under the CARES Act, the tax credit amount equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter. It was subject to an overall wage cap of $10,000 per eligible employee per year. Originally, the ERC only covered wages paid between March 13, 2020, and December 31, 2020.

Changes under the CAA

In December 2020, the Consolidated Appropriations Act (CAA) extended and greatly enhanced the ERC. Specifically, the CAA extended the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021.

In addition, for the first two quarters of 2021 ending on June 30, the CAA:

  • Increased the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus 50% under the original CARES Act rules), and

  • Increased the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules).

Important: For the first two quarters of 2021 ending on June 30, 2021, these changes effectively increase the maximum per-employee credit from $5,000 (50% x $10,000 of qualified wages) to $14,000 (70% x $10,000 of qualified wages x 2 quarters).

For the first two quarters of 2021 ending on June 30, the CAA included a liberalized employer eligibility rule based on a required more-than-20% decline in gross receipts, compared to the corresponding 2019 quarter (versus a required more-than-50% decline under the original CARES Act rules).

For the first two quarters of 2021 ending on June 30, the CAA also stipulated that for employers with 500 or more employees (versus 100 or more under the original rules), the ERC can only be claimed for qualified wages paid to employees who are unable to work due to a suspension of the employer's business or a lack of business. This change will allow more medium-sized employers to claim the credit in 2021.

In a retroactive change, the CAA stipulated that the ERC can be claimed for qualified wages paid with proceeds from Paycheck Protection Program (PPP) loans that aren't forgiven. This retroactive change goes back to the day the CARES Act was signed.  

Another Extension and Expansion under the ARPA

The ARPA was enacted on March 11, 2021. The new law extends 1) the ERC from June 30, 2021, until December 31, 2021, and 2) the rate of the credit at 70% for this time period. Qualified wages are generally limited to $10,000 per employee per calendar quarter in 2021. So, the maximum ERC amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021.

Employers who got a PPP loan in 2020 can still claim the ERC. But, when calculating the credit, the same wages can't be used both for seeking PPP loan forgiveness or satisfying conditions of other COVID-relief programs, such as the restaurant revitalization grants enacted as part of the ARPA. (See "Important Rules and Restrictions for 2021" below.)

Need Help?

The ERC provides struggling employers with a valuable tax break when they need it most. Contact your EHTC Tax Advisor to help you understand the rules and maximize your credit in 2020 and 2021.

Important Rules and Restrictions for 2021

A qualified employer is eligible for the Employee Retention Credit (ERC) if it experiences a significant decline in gross receipts or a full or partial suspension of business due to a governmental order. For 2021, small employers (with up to 500 full-time employees) can claim the credit without regard to whether the employees for whom the credit is claimed actually perform services. But, except as discussed below, large employers (with more than 500 full-time employees) can only claim the credit with respect to employees that don't perform services. 

An eligible employer can claim the refundable ERC against "applicable employment taxes" equal to 70% of the qualified wages it pays to employees in the third and fourth quarters of 2021.

Under the American Rescue Plan Act (ARPA), beginning in the third quarter of 2021, the following modifications will apply to the ERC:

  • Applicable employment taxes are the employer's share of Medicare (equal to 1.45% of the wages) and the amount of the tax under the Railroad Retirement Tax Act payroll tax that's attributable to the employer's Medicare tax rate. For the first and second quarters of 2021, "applicable employment taxes" are defined as the employer's share of Social Security tax (equal to 6.2% of the wages) and the amount of the tax under the Railroad Retirement Tax Act payroll tax that was attributable to the employer's Social Security tax rate.

  • So-called "recovery startup businesses" are qualified employers. A recovery startup business is generally a business that began operating after February 15, 2020, and meets certain gross receipts requirements. A recovery startup business will be eligible for an increased maximum credit of $50,000 per quarter, even if the business hasn't experienced a significant decline in gross receipts or been subject to a full or partial suspension under a government order.

  • A "severely financially distressed" employer who has suffered a decline in quarterly gross receipts of 90% or more compared to the same calendar quarter in 2019 will be able to treat all wages (up to the $10,000 limitation) paid during those quarters as qualified wages. This rule will allow a large employer (with over 500 employees) under severe financial distress to treat those wages as qualified wages regardless of whether its employees actually provide services.

  • The statute of limitations for assessments relating to the ERC won't expire until five years after the date that the original return claiming the credit is filed or treated as filed.

Contact your EHTC Tax Advisor for more information.

 

About EHTC

EHTC is a dedicated, full-service CPA firm in West Michigan that focuses on helping clients to achieve their full potential through comprehensive accounting, finance and tax services. We are a local firm with large firm resources, using a team approach to proactive client service that helps our clients gain a competitive advantage through our ability to develop strategies and present realistic solutions that build value.

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Tags: Employers, Business Owner, cares act, ERC

COVID-19 Relief for Employers: New Employee Retention Tax Credit

Posted on Tue, Apr 14, 2020

Visit EHTC's COVID-19 webpage for a compiled list of resources. Contact your EHTC Tax Advisor for more information and to determine what is best for you and your business. Please leave a message at (616) 575-3482 or email info@ehtc.com. Thank you for choosing EHTC as your strategic partner!

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Tags: Employers, Tax Credit, COVID-19, GrandRapids

Coronavirus Relief Options

Posted on Mon, Apr 06, 2020
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Tags: Employers, Checklist for Small Businesses, COVID-19, Paycheck Protection Program

What Employers Should Know about HSAs

Posted on Mon, Nov 04, 2019

Health Savings Accounts (HSAs) are a tax-smart way to cover an individual's uninsured medical expenses. Your business can set up HSAs for qualifying employees. Then the business can fully or partially fund the accounts or let employees fund them with salary-reduction contributions.

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Tags: Benefits, Employers, HSA

Technology May Help Solve Your Staffing Needs

Posted on Fri, Mar 29, 2019

When you think of "crowdsourcing," you probably think about people trying to raise money for a charitable purpose from friends, acquaintances and like-minded people on the Internet. But in the world of recruiting, crowdsourcing has now caught on in a big way.  

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Tags: Employers, Technology, Recruiting, Artificial Intelligence (AI)

Win the Salary Game

Posted on Wed, Sep 13, 2017

Salaries are a tough expense for most businesses. You want to hold them down but reining them in too tightly doesn't always work well. Good employees can often go elsewhere and replacing them can cost your company a bundle.

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Tags: Employers, Salary

IRS Guidance on Leave-Sharing Programs to Help Hurricane Harvey Victims

Posted on Mon, Sep 11, 2017

The IRS recently announced special tax relief for leave-based donation programs set up by employers to assist victims of Hurricane Harvey and Tropical Storm Harvey.

Basics of Employer Programs

Under a leave-based donation program, an employer can allow its employees to forgo their vacation, sick, or personal time off in exchange for cash payments made by the employer to charitable organizations. Under IRS regulations, leave-based charitable donations are ordinarily included in the donating employee's income. In addition, the opportunity to elect such contributions raises the concern that eligible employees might be taxed on income that could have been donated because the ability to make the contribution triggers "constructive receipt."

IRS Relief

The new IRS guidance addresses both concerns:

  • Cash payments that employers make to qualified tax-exempt organizations in exchange for vacation, sick, or personal leave that their employees elect to give up won't constitute income to the employees if the payments are made before January 1, 2019, for the relief of victims of Hurricane Harvey or Tropical Storm Harvey.

    Such payments don't need to be included in Box 1, 3, or 5 of the employee's Form W-2.
  • The opportunity to make a leave donation won't result in constructive receipt of income. Employees who participate in these programs can't deduct the value of the donated leave on their income tax returns. Reason: Such deductions would involve "double-dipping" because the donated time off already would have been excluded from their incomes.

    Employers cannot claim a charitable deduction for the value of the forgone leave. However, they will be permitted to deduct the contributions as trade or business expenses without regard to the charitable contribution restrictions under the tax code.

This guidance closely resembles the relief for leave-based donation programs that the IRS has issued after other recent disasters, including last year's severe storms and flooding in Louisiana and Hurricane Matthew.

If you need more information about leave-based donation programs, consult with your EHTC Tax Advisor or employee benefits advisor.

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Tags: Employers, IRS, Charitable Donations

Fine-Tune Marketing Efforts by Eyeballing the Competition

Posted on Mon, May 15, 2017

Chances are, you know who your business rivals are. But do you know what they're up to?

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Tags: Employers, Competitive Strategy

Become a Winner by Avoiding These 5 Mistakes

Posted on Wed, May 10, 2017

Establishing a winning position in the marketplace is obviously critical to your company's success. The position, however, must be based on a sustainable competitive advantage.

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Tags: Employers, Competitive Strategy

Employer Can Have Info about Whether Misclassified Workers Paid Tax

Posted on Fri, May 05, 2017

The U.S. Tax Court recently ruled that federal law doesn't prohibit an employer looking to reduce its tax liability on misclassified workers from receiving information on whether the workers paid tax on the income.

Background

Businesses often prefer to treat workers as independent contractors to lower their costs and administrative burdens. But the IRS may challenge an employer's classification. If an employer erroneously treats an employee as an independent contractor, the IRS may reclassify the worker. The employer could owe unpaid employment taxes, as well as interest and penalties, and may also be liable for employee benefits that should have been provided but were not. So, it's important to get worker classification questions right.

Facts of the Recent Case

As part of an audit, the IRS reclassified many of the independent contractors in a New Mexico Native American tribe as employees. The tribe sought to avail itself of the relief provided in the Internal Revenue Code, which allows an employer who fails to deduct and withhold the tax on wages to escape tax liability if it can show that the workers paid income tax on their earnings.

To gather this information, the tribe asked each worker to complete IRS Form 4669 "Statement of Payments Received," but it didn't get the form back from many former workers who had moved, and from other workers who lived in hard-to-reach areas.

The tribe filed a lawsuit against the IRS asking the tax agency to provide information about whether 70 workers had reported the income on their personal income tax returns and paid their tax liabilities. If so, the IRS would have to reduce the tribe's liability for failing to collect and pay withholding tax on the income.

The Law

The tax code provides a general rule that returns and return information should be kept confidential. The term "return information" includes the amount of an individual's tax payments. The IRS argued that the tax code prohibits the disclosure of information on the workers' income to the tribe.

There are, however, a number of exceptions to the general rule. One of those exceptions, states that: "A return or return information may be disclosed in a Federal or State judicial or administrative proceeding pertaining to tax administration, but only...(B) if the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding; [or] (C) if such return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding."

The Court's Ruling

The Tax Court concluded that the tax code did permit the disclosure of the tax return information requested by the tribe. It analyzed the code in pieces. First it asked: "What is a transaction relationship?" The court stated that to "transact" means simply "to carry on business." Citing a large number of cases that looked at that question, it added that the wide variety of business relationships that other courts have held are transactional relationships led it to hold that the relationship between an employer and his worker is one that pertains to the carrying on of a business.

Second, the court asked whether the return information that the tribe was asking for "directly relate[d]" to this relationship. The court concluded that it did since whether the tribe's workers paid their tax liabilities in full is likely to show whether the workers considered themselves to be independent contractors or employees, and thus directly related to the workers' relationship with the tribe.

Finally, as to the issue of whether the return information affected the resolution of an issue in the proceeding, the court stated that it did. "If the Tribe's workers did indeed pay their tax liabilities, then the Tribe's Code Sec. 3402(d) defense would be proved and would be entirely resolved," it explained. (Mescalero Apache Tribe, 148 TC No. 11, 4/5/17)

The Implications

The court's ruling could have wide-reaching effect because it can be difficult for businesses to obtain a signed Form 4669 from a worker because:

  • IRS audits often take place years after the relevant payroll tax returns are filed,
  • A business may have high turnover and not be able to locate workers, and
  • Even if a business does locate workers, they may not want to fill out the IRS forms — especially if they no longer work for the business.

Therefore, this court ruling could often make the difference between the business being forced to pay the withholding tax even when the worker has already paid the corresponding income tax, and the business not having to make that payment. If your business is involved in a payroll audit, your tax professional may request that the IRS provide information on the workers' relevant tax payments. This court ruling can be used as support for this request.

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Tags: Employers, IRS, Independent Contractor