There were some valuable modifications and extension of the Employee Retention Credit
(ERC) included in the American Rescue Plan Act (ARPA), signed by President Biden on March 11, 2021.
We would be happy to assist you in analyzing whether claiming the modified and extended ERTC might
benefit your business.
Background: Congress originally enacted the ERC in the Coronavirus Aid, Relief and Economic
Security (CARES) Act in March of 2020 to encourage employers to hire and retain employees during the
pandemic. At that time, the ERC applied to wages paid after March 12, 2020 and before January 1,
2021. However, Congress later modified and extended the ERC to apply to wages paid before July 1,
Changes: ARPA extended and modified the ERC to apply to wages paid after June 30, 2021
and before January 1, 2022. Thus, an eligible employer can claim the refundable ERTC 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.
Except as discussed below, qualified wages are generally limited to $10,000 per employee per calendar
quarter in 2021. Thus, the maximum ERC amount available is generally $7,000 per employee per
calendar quarter or $28,000 per employee in 2021.
For purposes of the ERC, a qualified employer is eligible for the ERC if it experiences a significant
decline in gross receipts or a full or partial suspension of business due to a governmental order.
Employers with up to 500 full-time employees (i.e., small employers) can claim the credit without regard
to whether the employees for whom the credit is claimed actually perform services. But, except as
discussed below, employers with more than 500 full-time employees (i.e, large employers) can only
claim the ERTC with respect to employees that do not perform services.
Employers who got a Payroll Protection Program (PPP) loan in 2020 can still claim the ERC. But, the
same wages cannot be used both for seeking PPP loan forgiveness or satisfying conditions of other
COVID-relief programs (such as the restaurant revitalization grants enacted as part of the ARPA) and in
calculating the ERC.
Beginning in the third quarter of 2021, the following modifications apply will apply
to the ERC:
• Applicable employment taxes are the employer’s share of Medicare (also called hospitalization
insurance or HI) taxes (equal to 1.45% of the wages) and the amount of the tax under the Railroad
Retirement Tax Act payroll tax that is attributable to the employer’s HI tax rate. For the first and second
quarters of 2021, ”applicable employment taxes” were defined as the employer’s share of Social
Security tax (equal to 6.2% of the wages) and the amount of the tax under the Railroad Retirement Tax
Act payroll tax that was attributable to the employer’s Social Security tax rate.
• Recovery startup businesses are qualified employers. A recovery startup business is generally a
business that began operating after February 15, 2020, and that meets certain gross receipts
requirements. A recovery startup business will be eligible for an increased maximum credit of $50,000
per quarter, even if the business has not experienced a significant decline in gross receipts or been
subject to a full or partial suspension under a government order.
• A ”severely financially distressed” employer who has suffered a decline in quarterly gross receipts of
90% or more compared to the same calendar quarter in 2019 will be able to treat all wages (up to the
$10,000 limitation) paid during those quarters as qualified wages. This rule will allow a large employer
(i.e., an employer with over 500 employees) under severe financial distress to treat those wages as
qualified wages whether or not its employees actually provide services.
• The statute of limitations for assessments relating to the ERC will not expire until five years after the
date that the original return claiming the credit is filed or treated as filed. For example, if the Form 941 for
the fourth quarter of 2021 claiming the ERC is treated as filed on April 15, 2022, the return could be
audited with respect to the ERC as late as April 14, 2027.
If you have any questions relating to how the extension or modifications will affect your business’s
claiming the ERC, please let us know.