On March 11, 2021, President Joe Biden enacted the American Rescue Plan Act of 2021 (the “ARPA“), considered one of the largest economic bailouts in U.S. history. ARPA addresses the current economic challenges facing employers and employees as a result of the COVID-19 pandemic. One of the most important provisions for a small employer in ARPA is the extension of employee retention credit (the “CER“).

CONTEXT

CARES Act. The ERC was first introduced into the CARES Act in March 2020 when COVID-19 began. The ERC was designed to encourage companies to keep their employees on their payroll by offering a refundable tax credit equal to 50% of eligible salary (including certain health plan expenses), up to a maximum of $ 10,000 per employee. This credit was available for salaries paid after March 12, 2020, but before January 1, 2021. An employer was eligible for the tax credit if he experienced in 2020:

• total or partial suspension of its activity due to a government order due to COVID-19 during a calendar quarter; Where
• significant decrease in gross revenue of 50% or more compared to the same quarter in 2019.

The definition of skilled salaries changes depending on the number of employees. If an employer had an average of 100 full-time employees or more in 2019, then he could only claim the tax credit on salaries paid to employees who are not providing services. A smaller employer, on the other hand, could claim the credit for all wages paid to its employees, whether or not the employees provide services.

Under the CARES Act, an employer who received a PPP loan at any time could not claim the ERC. However, this rule was changed by the Taxpayer Certainty and Disaster Tax Relief Act of 2020. Under this law, an employer who has received a PPP loan is allowed to claim the ERC for eligible wages that are not counted as salary costs for the cancellation of the PPP loan.

CAA. In December 2020, the 2021 consolidated finance law (the “CAA”) Extended the ERC until June 30, 2021. The CAA also extended the tax credit from 50% to 70% of eligible wages and broadened the definition of eligible employers to allow more employers to join. to qualify. CAA has expanded eligibility by:

• reduce the gross revenue reduction requirement from 50% to 20%;
• increase the eligible salary limit from $ 10,000 per employee to $ 10,000 per shift, per employee; and
• increase the limit of 100 full-time employees in the definition of eligible salary to 500 full-time employees.

Therefore, an employer with fewer than 500 full-time employees would be entitled to claim the EWC for eligible wages paid to its employees, even if those employees were providing services.

NEW IN ARPA

ARPA extends ERC from June 20, 2021 until the end of 2021. ARPA follows expanded eligibility requirements under CAA, but tax credit can only be claimed on Medicare taxes (1.45%, hospitalization insurance). Under the CARES law and the CAA, the credit could be deducted from social security taxes (6.2%, OASDI).

The ERC is also limited to $ 50,000 per quarter for an eligible employer that is a recovery start-up business. A start-up business generally refers to any employer who started their business after February 15, 2020, with annual gross revenues of less than $ 1.0 million on average, and who have suffered a total (or partial) suspension of their business. due to a government order due to COVID-19 or a significant drop in gross revenue.

ARPA clarifies that qualified salaries for the purposes of the ERC do not include salaries considered as salary costs for:

• PPP loans, including second-draw PPP loans;
• subsidies to operators of closed sites, and
• restaurant revitalization grants.

However, ARPA allows employers who opened new businesses after 2019 to look to 2020 wages to determine qualified wages.

Clearly, the ERC can greatly benefit small employers by providing much-needed funds to help them weather the COVID-19 pandemic. However, the eligibility rules and the calculation of the amount of the ERC can be complicated. Therefore, employers should contact their tax advisors now to see if they qualify and start claiming these tax credits.

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