When COVID-19 hit and offices closed, Congress mobilized and passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Included with an assortment of credits and other provisions was the Employee Retention Credit (ERC) which allowed for a refundable tax credit of up to $5,000 per employee for organizations that continued to pay employees who were no longer providing services. The ERC is not a loan or a grant, but a federally legislated payroll tax credit, now available as a refund, designed to help organizations that were able to retain employees during the pandemic.
Although a large number of businesses in many industries were obviously hit hard by COVID 19, government contractors were especially impacted as your clients, federal, state and local government agencies, were among the quickest to close their doors. Even if your offices were not closed immediately, the inability of your employees to perform their services on behalf of clients can trigger the ability to file for and receive refunds. In some cases, government contractors continued to receive payments from their clients designed to offset COVID related losses due to work stoppage. Receipt of such payments could impact your ability to qualify for the ERC and should also be considered.
The general specifics of the ERC as originally enacted are:
- To qualify for ERC one of the following two points must have been met in order to qualify, and refunds may be available for the time periods of suspension or revenue decline:
- The business must have experienced a full or partial suspension of business from March 13, 2020 or any period forward because of governmental orders limiting commerce, travel or meetings due to COVID 19, or
- The business must have experienced a significant decline in gross revenue. A significant decline in gross receipts is calculated by determining the first calendar quarter in 2020 in which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019.
- The final requirement is that there must be instances where employees were not performing services because the business was impacted by either 1 or 2 above, were still paid wages and/or the company still paid employee healthcare costs.
As the pandemic continued it became obvious that the CARES Act/ERC program, designed to sunset December 31, 2020, needed to be renewed and perhaps enhanced. Congress passed additional legislation in 2021 which extended the duration of the ERC through December 31, , 2021 and made several other changes that significantly enhance the opportunities for credits/refunds in both the current and prior year. Some of those changes and enhancements include:
- The CARES Act did not allow employers that received funds from the Paycheck Protection Program (PPP) to receive Employee Retention Credits. The new legislation allows employers who took advantage of the PPP to receive ERC refunds for 2020, and to take credits for 2021, provided they meet the other eligibility requirements.
- The new legislation increases the maximum credit or refund for 2021 to $7,000/quarter per employee, thus allowing for a potential benefit of $28,000 for the current year..
- The new legislation changed the definition of a significant decline in gross receipts for 2021 to encompass a decline of 20% or greater compared to 2019, instead of 50%.
- Prior legislation allowed for ERC applicability for small employers, defined as less than 100 employees, for all wages paid to employees if the organization itself otherwise qualified, regardless of whether each employee qualified. The new legislation increased the definition of small employer for 2021 from 100 employees to 500 employees.
Current Considerations & Potential Next Steps
As a result of the 2021 legislative changes there are both enhanced credits available for 2021, and an expanded ability to receive refunds for 2020. Many employers who would not have qualified at the time, now may have refunds available to them. So, what to do?
- If you previously disregarded the ERC because your organization received a PPP loan, think again! This provision of the new legislation is probably the most significant change because it opens up the refund applicability for 2020 to many employers who were not eligible under the original CARES Act restrictions.
- When considering impacted employees, many employers did not take into account instances where there were furloughs with no wages paid but a continuation of employer paid healthcare. Those healthcare costs are generally considered wages in this context, with ERC Credits/refunds available.
- Consider your organizational status since January 1, 2021. Although some companies are in a much better place than in 2021, many are still impacted. The increase in potential credits from $5,000 to $14,000 per employee is certainly significant.
- Determine whether your agency client continued to make payments to you as an offset for payroll loss during the pandemic shutdown and analyze ERC applicability as a result.
Finally, if you don’t have the bandwidth or internal expertise to determine if you qualify and to quantify the refund, get some assistance. Depending on whether you are a small or large employer, the work to analyze applicability can vary in complexity, as does the process to capture the refunds which might be available. The amounts at stake could be a game-changer for some companies, providing a lifeline as, hopefully, the pandemic recedes and the worries about shutdowns by governmental order, furloughs and declines in gross revenue are put behind us.
If you have any questions about the information above, please contact your E. Cohen advisor.
