The employee retention credit (“ERC”), enacted as part of the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act, is a fully refundable tax credit that can be as high as $26,000 per employee. Originally, the ERC was equal to 50% of up to $10,000 in wages paid to each employee before January 1, 2021. However, Congress has since extended and expanded the ERC through subsequent COVID-19 legislation. As a result of the new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages paid to employees after December 31, 2020, through September 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 for the first 3 calendar quarters. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $21,000 in 2021.
Generally, an employer is eligible for the ERC if it fully or partially suspended its operations due to a governmental order limiting commerce, travel, or group meetings due to COVID-19. Alternatively, an employer may qualify for the ERC in 2021 if it had gross receipts for any such quarter, or for the immediately preceding quarter that are less than 80% of its gross receipts for the same quarter in 2019.
The term “qualified wages” is defined differently for “small” and “large” employers. For the 2021 credit, small employers are those that averaged 500 or fewer full-time employees in 2019. For small employers, qualified wages are all wages and Qualified Health Plan Expenses paid for all employees for the applicable quarter. For large employers, qualified wages are only wages and Qualified Health Plan Expenses paid for employees for a period or periods that the employee did not perform services for the employer.
There is risk to an employer taking the ERC if it is determined that it is not eligible for the credits upon an IRS audit, which would likely result in the underpayment of taxes, interest, and penalties. The CARES Act, however, provides that the Secretary of the Treasury shall waive any such penalty if the Secretary determines that such failure was due to the “reasonable anticipation” of the credit.
It is important to note that the American Rescue Plan Act of 2021 extended the statute of limitations for the ERC from the normal three-years to five-years. We believe this is an indication that the IRS is expecting to aggressively enforce the ERC program. Employers are encouraged to reach out to Polsinelli PC or other tax professionals to make sure they are taking the appropriate steps in evaluating their eligibility for the ERC in order to avoid any potential penalties for failing to make timely tax deposits. Polsinelli PC has extensive experience in this area and can help employers take the necessary steps in satisfying the “reasonable anticipation” standard.
Additionally, some employers taking advantage of this program have found that due to the IRS’s backlog in processing adjusted employment tax returns on which employers claim ERC retroactively, they are being assessed penalties. On April 28, 2022, the IRS issued a reminder that employers may be eligible for relief from such penalties if they can show reasonable cause and not willful neglect for failure to pay.
