WOLF & CO Alerts American Rescue Plan Act: Impact to the Employee Retention Credit

American Rescue Plan Act: Impact to the Employee Retention Credit

The Employee Retention Credit (ERC) was originally enacted under the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020. The program was extended from January 1 through June 30, 2021 by the Consolidated Appropriations Act (CAA). The CAA supercharged the benefit for this period by introducing new mechanics and high thresholds, and also lifted the previous ban on businesses receiving Paycheck Protection Program (PPP) loan forgiveness from being eligible for the credit for both the extended period and also retroactively for 2020.

The American Rescue Plan Act (ARPA) of 2021, signed on March 11, 2021, now extends the benefit through the July 1, 2021 to December 31, 2021 period. As such, an eligible employer can claim the refundable ERC against ‘applicable employment taxes’ (as defined below) equal to 70% of the qualified wages it pays to employees in the third and fourth quarters of 2021. The extension increases the potential per employee credit from $19,000 to $33,000 for the 2020 and 2021 combined period. It’s important to note that the statute of limitations for the credit is extended to five years after the date that the original return claiming the credit is filed or treated as filed.

The mechanics are largely aligned with what was set forth in the CAA. Please refer to our technical dive into the matter, Employee Retention Credit: What You Need to Know, for more information.

Starting Q3 of calendar year 2021, the applicable employment taxes are the employer’s share of Medicare (also called hospitalization insurance or HI) taxes (equal to 1.45% of the wages). Note that the employer’s share of Social Security tax (equal to 6.2% of the wages) is the applicable tax for the preceding periods. Given the lower rate, it could take longer for a taxpayer to immediately receive the benefit through withholding alone and consideration could be given as to whether its appropriate to file a Form 7200, Payment of Employer Credits Due to COVID-19.

Any business, including businesses exceeding the large employer threshold, who are considered ‘severely financially distressed,’ defined as a decline in quarterly gross receipts of 90% or more compared to the same calendar quarter in 2019, is eligible to treat all wages, up to the $10,000 limitation, paid during those quarters as qualified wages. This rule effectively permits large employers with this substantial decline in gross receipts to treat wages as qualified wages, whether or not its employees continue to work.

In addition, qualified wages paid by an employer cannot be used towards:

  • Second Draw PPP loan forgiveness
  • Other COVID-19 payroll tax credits
  • Shuttered venues assistance
  • Restaurant revitalization grants

Wolf is assisting our clients in determining eligibility under the decline in gross receipts or government shutdown criteria, as well as assisting with the necessary credit calculations.