Breaking Down the Changes to the Employee Retention Credit

January 25, 2021 -

CARES Act

As part of the CARES Act passed in March of 2020, Congress created the Employee Retention Credit (ERC) designed to financially assist businesses affected by COVID-19. 

The ERC is a refundable payroll tax credit that was only available to taxpayers who either 1) had their business fully or partially suspended during at least one quarter in 2020 due to orders from a government authority, or 2) had at least an 50% drop in gross receipts in any quarter in 2020 relative to the same quarter in 2019.

If a business took advantage of the Paycheck Protection Program (PPP), they were barred from also taking advantage of the ERC.

The credit, which applied to “qualified wages” (including qualified health plan expenses) paid after March 12, 2020 and before January 1, 2021, was equal to 50% of “qualified wages” paid, limited to $10,000 per employee for the entire year.  As a result, the maximum credit per employee was limited to $5,000 ($10,000 x 50%).

The term “qualified wages” differed based on the number of employees a business had during 2019.  For a business that averaged more than 100 full-time equivalent (FTE) employees, only wages paid to employees who stayed at home and did not provide any services qualified.  For a business that averaged 100 or less full-time equivalent (FTE) employees, all wages qualified.

Consolidated Appropriations Act, 2021 (CAA, 2021)

As part of CAA, 2021, Congress extended the ending date for the ERC from December 31, 2020 to June 30, 2021.

For the period January 1, 2021 to June 30, 2021, the credit is now available to taxpayers who either 1) had their business fully or partially suspended during any quarter in the first half of 2021 due to orders from a government authority, or 2) had at least a 20% drop in gross receipts in any quarter during the first half of 2021 relative to the same quarter in 2019.  In addition, companies are now allowed to elect to use the gross receipts from the immediately preceding quarter, and compare the preceding quarter’s gross receipts to the same quarter in 2019.     

If a business took advantage of the Paycheck Protection Program (PPP), they are no longer barred from also taking advantage of the ERC.  However, they cannot claim the credit on any wages that were also forgiven under the Paycheck Protection Program (PPP).  As this change is retroactive, a business can now amend prior payroll tax filings to claim the refundable credit.  In addition, an employer can now request for an advance of the 2021 credit, based on 70% of the average quarterly wages for the same quarter in 2019.

The credit on “qualified wages” paid between January 1, 2021 and June 30, 2021, is now equal to 70% of “qualified wages”, limited to $10,000 per employee per quarter.   As a result, the maximum credit per employee is now $14,000 ($10,000 X 2 X 70%).

For the period January 1, 2021 to June 30, 2021, the term “qualified wages” still differs based on the number of employees a business had during 2019.  However, the threshold before a change in treatment, has increased from 100 to 500 employees.

Please note, the change to expand the eligibility rules for the ERC to include borrowers of a PPP loan is the only provision retroactive.   As a result, the calculation of any retroactively claimed credit, remains the same, as provided for in the CARES Act.

If you have any questions or if you would like to discuss any of these changes in greater detail, please contact your tax professional at Dermody, Burke & Brown CPAs. 


The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.