The Employee Retention Credit (ERC) was established under the CARES Act legislation enacted in March of 2020. Since its inception, the ERC has continued to evolve. While there’s a significant amount of information out there for businesses to digest, it’s worth the effort because the savings can be significant.
For qualified wages paid in 2020, the ERC is up to $5,000 per employee. For qualified wages paid in 2021, the ERC is up to $7,000 per employee, per quarter. Since the Consolidated Appropriations Act, 2021 (CAA), legislation enacted in December 2020 extended the ERC through the first two quarters of 2021, you could receive up to $14,000 per employee for 2021. The CAA also modified the eligibility and program terms for the credits claimed against qualified wages in 2020 and 2021 and allowed PPP loan recipients to claim the ERC, if wages are not claimed as a double benefit.
On March 1, 2021, the IRS issued Notice 2021-20, which provides clarity and new ERC guidance as it applies to qualified wages paid after March 12, 2020, and before January 1, 2021. There are several key points within this guidance and recently enacted legislation for employers to consider.
Paycheck Protection Program (PPP) & disallowed payroll for the ERC – Notice 2021-20 clarifies that wages used for PPP forgiveness, up to the loan amount, cannot be used for the ERC. This clarity brings good news to the many businesses that submitted payroll in excess of the loan amount on the forgiveness application to make sure they would have more than enough payroll for forgiveness. The Notice indicates that, if a business had non-payroll costs that could have been used in the forgiveness application, but chose to include only payroll, they cannot reduce the payroll used in forgiveness by these non-payroll costs when determining how much payroll is disallowed for ERC. The business must use what was in the forgiveness application, up to the loan amount. If a business submitted both payroll and non-payroll costs in the forgiveness application, they could consider those non-payroll costs when determining how much payroll to exclude for purposes of ERC.