Important Information
- The ERC is equal to 50% of qualified wages paid, including qualified health plan expenses, up to $10,000 per employee in 2020.
- For each employee, the maximum credit available is $5,000 in 2020.
- Employers are required to report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns.
Last month, on March 1, 2021, the Internal Revenue Service (IRS) issued Notice 2021-20 providing guidance for employers claiming the 2020 employer retention tax credit (ERC). The ERC was created by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in an effort to encourage employers to keep employees on their payroll, despite experiencing COVID-19 challenges and hardships.
Employer Eligibility
An employer can claim ERC if they meet two conditions:
- They paid qualified wages between March 12, 2020, and January 1, 2021, and
- They experienced a full or partial suspension of operations or a significant decline in gross receipts.
Interaction with the PPP
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 enables eligible employers that received a Paycheck Protection Program (PPP) loan to claim the ERC. The PPP was established to help businesses keep their workforces employed during the COVID-19 pandemic.
Employers can claim the ERC even if they receive or received a PPP loan. However, the IRS has stated that any wages that would count towards eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both of them.
The IRS Notice
The IRS notice clarifies employer ERC eligibility and supplements the employee retention credit FAQs. It also defines important terms, like “qualified wages,” and describes retroactive changes that apply to 2020. Again, this notice only includes rules for 2020. The IRS announced that additional guidance will be published soon for 2021 changes.
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