New Tax Credit Can Save Businesses Up To $14,000 Per Employee

While the Paycheck Protection Program (PPP) garners most of the attention for small business relief, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 also created the Employee Retention Credit (ERC), which provided eligible employers a refund on their 2020 federal payroll expenses such as Social Security and Medicare taxes.

The ERC shares the same goal of PPP to incentivize employers to keep employees on the payroll during Covid-related shutdowns and restrictions. The ERC benefits were capped at $5,000 per employee for Q2, Q3, and Q4 of 2020 in the aggregate, which for most companies was far less than they could receive under PPP, so few used it.

The Taxpayer Certainty and Disaster Tax Relief Act (part of the Consolidated Appropriations Act, 2021), enacted December 27, 2020, and the recently enacted American Rescue Plan (ARP), expanded the ERC through the end of 2021 and increased the refundable and advanceable credit to $7,000 per employee for two quarters each or up to $14,000. Internal Revenue Service Guidance explains these changes in greater detail.

Businesses can now use ERC and PPP

The main issue with the Employee Retention Credit in 2020 was that companies who applied for and received PPP funds could not take advantage of both programs. For most companies, PPP was easier to access and offered more relief. PPP was calculated by multiplying monthly payroll in 2019 times 2.5 with a cap on maximum salary of $100,000 equaling up to $20,800 per employee. Conversely, ERC was only up to $5,000 per employee.

The recent legislation fixed this issue by allowing employers to take advantage of both ERC and PPP in 2021. The one caveat is funds from both programs cannot be used on the same payroll period; in other words, “no double dipping.” Due to the forgiveness rules around PPP, this should not be an issue. Businesses can pick their covered period of between eight and 24 weeks during which they can use their PPP funds on payroll and other qualified expenses and still receive forgiveness. Businesses can use the ERC during different time periods.

In some cases, employers can also “look back” to 2020 to claim the ERC retroactively. Specifically, those employers who received a PPP and, therefore, didn’t claim ERC can now do so for 2020.​​​​​​ In order to claim the ERC for 2020, employers must file amended returns for each applicable quarter of 2020.