Employee Retention Credit Updates Under ARPA

The recently passed American Rescue Plan Act (ARPA) is structured to provide additional assistance to taxpayers and businesses as we navigate the ongoing pandemic. Economic Impacts from the COVID-19 virus have impacted every person in our nation in some way.

Some of the tax updates in the ARPA will offer more safeguards to businesses. One area that will see changes, is the Employee Retention Credit (ERC). Under APRA, the following updates for ERC include:

  • Extending the ERC from June 30, 2021, to December 31, 2021. This legislation will continue the ERC rate of credit at 70% during this extended time frame. This legislation continues to allow for up to $10,000 in qualified wages for any calendar quarter. This means an employer could have up to $40,000 in qualified wages per employee through 2021.
  • Limits the ERC to $50,000 per calendar quarter of an eligible employer that is a “recovery startup business” as defined in Code Sec. 3134(c)(5). A recovery startup business is defined as:
    • One that began operations after February 15, 2020, whose average annual gross receipts for a 3-taxable-year period ending with the taxable year which precedes such quarter does not exceed $1,000,000; AND
    • One that experiences a full or partial suspension of operations due to a governmental order or experiences significant gross receipts decline.
  • The ERC will allow the credit to be claimed against Medicare (1.45%, Hospital Insurance – HI) taxes only. Since Medicare’s tax rate is 1.45%, it may take longer to claim the credit in quarters three and four for 2021 under the ARPA. Employers may prefer to file FORM 7200 (Advance Payment of Employer Credits Due to COVID-19) rather than immediately withholding the taxes.
  • Continues the year-over-year gross receipts decline requirement at 20%, and the threshold for qualified wages (even if the employee is working) would continue to be 500 employees as expanded by the Consolidated Appropriations Act, 2021 (CAA). Certain governmental agencies would continue to be exempt from claiming the ERC, except tax-exempt organizations that include colleges and universities or medical or hospital care providers.
  • The Treasury Secretary is to issue guidance that payroll costs paid in the covered period do not fail to be treated as qualified wages to the extent that a covered loan under the Small Business Act is not forgiven. This recent legislation means that Paycheck Protection Program (PPP) recipients would be eligible if the loan did not pay the wages in question.
  • Qualified wages paid by an employer taken into account as payroll costs under:
    • Second draw PPP loans,
    • Shuttered venues assistance, and
    • Restaurant revitalization grants are not eligible for the ERC

The recently passed ARPA is a lengthy document with many changes to the previous economic stimulus packages. Our team of experienced tax advisors are continually reviewing these updates to ensure that we can provide you with the best guidance possible for your unique situation. Please contact us with any questions.


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