When Congress passed The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, the legislation included multiple business relief provisions. One provision, the Employee Retention Credit (ERC), was instituted to encourage employers to retain employees on their payrolls during this unprecedented and uncertain time. Since then, Congress has passed laws making changes to and extending the ERC. The Internal Revenue Service (IRS) recently provided long-awaited guidance on these modifications. If you own a business, you will want to know more about the ERC changes that may impact your enterprise. Here is more on the employee retention credit and how you can use it for your Florida business.
The Employee Retention Credit
The ERC is a refundable tax credit that can be applied against certain employment taxes. The credit was put in place to 1) offer relief for businesses impacted by the pandemic and 2) act as an incentive for employers to keep workers on their payroll.
Initially, the ERC and its provisions applied to:
- Employers whose business operations were partially or fully suspended during 2020 due to a COVID-19 order limiting travel, commerce, or group meetings issued by an appropriate government authority, or
- Whose gross receipts for a calendar quarter beginning after December 31, 2019, were less than 50% of gross receipts in the same calendar quarter for the prior year (Gross Receipts Test).
These qualifying employers were permitted to claim the ERC for employment taxes up to 50% of wages paid to employees between March 12, 2020, and January 1, 2021. The maximum amount of qualified wages taken into account for each employee for all calendar quarters was $10,000. Therefore, the maximum credit for an eligible employer for qualified wages paid to any employee was $5,000.
Taxpayer Certainty and Disaster Tax Relief Act (TCDTR)
On December 27, 2020, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act (TCDTR) of 2020. The TCDTR made significant changes to certain portions of the ERC. These changes modified and extended the ERC for six months through June 30, 2021.
As modified, the new law allowed:
- Eligible employers to claim the ERC equal to 70% of the qualified wages they paid to employees after December 31, 2020, through June 30, 2021.
- Employers whose gross receipts fell below 80% for the same quarter in 2019 became eligible to qualify under the ERC’s Gross Receipts Test.
- A per-employee wage limit was increased from $10,000 for the year to $10,000 per quarter for 2021.
- An increase from 100 to 500 employees, permitting employers with 500 or fewer full-time workers in 2019 to claim the ERC for wages paid to those continuing to perform service.
- Removed the limitation that employers only count wages up to the amount an employee would have been paid for 30 days preceding the period.
- Employers not in existence for all or part of 2019 to claim the ERC based on their 2020 quarters.
- Employers who receive or received a PPP loan to qualify for the ERC with respect to wages that are not paid for with forgiven PPP loan proceeds.
The American Rescue Plan Act of 2021
In March of 2021, Congress passed the American Rescue Plan Act of 2021 (ARPA). The new law extended the ERC to cover qualified wages paid after June 30, 2021, and before January 1, 2022. This change expanded the ERC for 2021, allowing employers to claim up to $7000 per employee per quarter. The ERC was also made available in 2021 to employers who met the COVID-19 order condition or the 80% Gross Receipts Test.
According to recent IRS guidance, the rules are mostly the same for the third and fourth quarters of 2021 as they were for the first and second quarters. However, there are some changes as follows:
- Allowing recovery startup businesses that began operations after February 15, 2021, and have average annual gross receipts of $1,000,000 or less to claim the ERC.
- The credit for startup businesses is capped at $50,000
- Qualifying employers include those with more than 500 full-time employees (large distressed employers) in 2019 with COVID-19 related suspended operations or whose gross receipts declined more than 90% compared to the same quarter in 2019.
- The maximum employee retention credit for 2021 is $28,000 per employee.
- For the 3rd and 4th quarters of 2021, a qualified employer may claim the retention credit against Medicare taxes rather than, as previously, Social Security taxes.
- The ERC is available for all employees for qualifying employers with 500 or fewer employees.
- For qualifying employers with more than 500 employees, the credit is available only for furloughed employees.
- For the 3rd and 4th quarters of 2021, certain severely financially distressed large employers (with more than 500 employees) may receive retention credit for all employees
- A severely distressed large employer has gross receipts for a 2021 calendar quarter of less than 10% of the gross receipts it had for the same calendar quarter in 2019.
- An employer who receives a PPP loan, and the loan is not forgiven, may take the employee retention credit in 2020 or 2021.
Additional IRS Guidance
The IRS also provided guidance for employers on the following:
- Full-time equivalents are not required when determining the average number of full-time employees.
- Wages paid to full and part-time employees may be treated as qualified wages.
- Wages paid to a majority corporation owner, spousal wages, and those paid to other relatives may not be considered qualified wages.
- Cash tips and qualified wages.
- Adjusted 2020 return guidance regarding the ERC.
- Business acquisition information for 2021.
- Gross receipts, quarterly calculation information, and
- Other information.
How Can My Florida Business Qualify for the ERC?
As indicated above, the question of whether your business can qualify for an ERC depends on whether: 1) you meet the definition of a “qualified employer” and 2) the time period in question.
The most recent IRS guidance has provided some clarification regarding the ERC. However, this is a complex area and the rules are different depending on the applicable time frame. Therefore, it’s important that you analyze your business’s eligibility with the advice of your accountant or CPA.
Contact an Experienced Florida Business Attorney
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.