Legal Alert: Valuable Employee Retention Tax Credits Available Through 2021, More Accessible for Startups

As part of the American Rescue Plan Act of 2021 (ARP), Congress extended the Employee Retention Credit (ERC) program through the end of calendar year 2021 and expanded the program to accommodate startup businesses and nonprofits that were created during the COVID-19 pandemic. 

Specifically, established employers who are negatively impacted by COVID-19 in 2021 may now receive up to $28,000 per retained employee as either a tax credit or a direct payment from the IRS. 

Pandemic-era startups can receive up to $14,000 per retained employee over the latter two quarters of 2021 (up to a maximum of $50,000 per quarter for all employees, or $100,000 for the year) without having to prove that they were negatively affected by the pandemic.  

Additional program details include:

Eligible Employers

Established employers can claim an ERC in 2021 if they experience either (1) a full or partial suspension of their operations because of governmental orders limiting commerce, travel, or group meetings due to COVID-19 in 2021; or (2) a decline in gross receipts resulting in one 2021 quarter amounting to less than 80 percent of the gross receipts in the same 2019 quarter. (The 2020 ERC program required a 50 percent decrease in gross receipts to qualify under this latter test, meaning that it is much easier to qualify for ERCs in 2021.) 

Alternatively, an employer can look to a drop in 2021 versus 2019 receipts in an immediately preceding quarter to meet the 80 percent test for a particular 2021 quarter; for example, an employer seeking to claim an ERC for the third quarter of 2021 could base its eligibility on there being an over 20% decline in gross receipts in the second quarter of 2021 versus the second quarter of 2019.  

If an entity was not in business in 2019, it can use the corresponding calendar quarters from 2020 to meet the 80% gross receipt reduction test.

Finally, the ARP enables "recovery startup businesses" to claim ERCs for the latter two quarters of 2021 even if they do not meet the operational suspension or receipt reduction tests above. A “recovery startup business” is an organization that (i) began operations after February 15, 2020; and (iii) has average annual gross revenues of no more than $1,000,000.

Covered Employees

For employers with under 500 employees in 2019, 2021 ERCs can be claimed for all employees who were retained while the employer was affected by suspended operations or the qualifying decline in gross receipts. (In 2020, only employers with less than 100 employees could count the wages of both active and inactive workers.)

For employers with over 500 employees in 2019, 2021 ERCs can generally only be claimed for employees who were not providing services or who had their hours reduced due to COVID-19 but who remained on the employer’s payroll. The ARP allows “severely distressed” large employers—defined as those with gross receipts for a 2021 calendar quarter totaling less than 10% of the corresponding 2019 quarter—to ignore this rule and claim ERCs for all employees.   

Value of ERC

The value of the tax credit is 70 percent of qualified wages (including group healthcare expenses) paid to covered employees in any qualifying 2021 quarter, up to a maximum of $10,000 in wages per employee per quarter; as a result, employers can claim up to $7,000 per quarter or a total of $28,000 in ERCs per employee in 2021. (The 2020 ERC program was capped at $5000 per covered employee, making the 2021 version significantly more valuable.)
For employers who qualify for ERCs as a “recovery startup business”, credits can only be claimed for wages paid in the 3rd and 4th quarters of 2021 and are capped at $50,000 per quarter for all employees.  

Claiming ERCs

ERCs are fully refundable tax credits, meaning that they are first offset against the employer’s share of payroll taxes on their quarterly tax filings and then, if there is remaining value, can be claimed as a direct payment from the IRS using a separate form. Employers with fewer than 500 employees can also file IRS Form 7200 to obtain an advance payment of the credit based on 70% of the average quarterly payroll for the same quarter in 2019. Employers are responsible for repaying any difference between the value of Form 7200 advance payments they receive and the ERCs they are ultimately eligible for. 

An employer seeking to claim the ERC for prior quarters may do so by filing amended payroll tax returns.

Interaction with PPP Forgiveness

Employers can claim ERCs for wages that were not forgiven under PPP’s loan forgiveness process, but cannot “double-dip” and claim ERCs for payroll expenses that are ultimately forgiven. This rule applies to both 2020 and 2021 ERC claims. 

Additional information for nonprofits and small businesses impacted by the coronavirus pandemic is at the D.C. Bar Pro Bono Center’s Coronavirus Legal Resources section at www.lawhelp.org/dc/NPSB. 

If you have questions about these programs or other legal issues, feel free to contact us at npsb@dcbar.org.

This communication is provided by the D.C. Bar Pro Bono Center solely for informational purposes, without any representation that it is accurate or complete. It does not constitute legal advice and should not be construed as such. It does not create an attorney-client relationship between the recipient and any other person, or an offer to create such a relationship. This communication contains information that is based, in whole or in part, on the laws of the District of Columbia and is current as of the date it is written. However, laws vary from state to state and may change from time to time. As a result, the information may not be appropriate for anyone operating outside the District of Columbia and may no longer be timely. Consult an attorney if you have questions regarding the contents of this communication.