The IRS Provides Guidance on the Employee Retention Credit

The Internal Revenue Service (IRS) released new guidance this week for employers that are claiming the Employee Retention Credit for 2020. The guidance applies to qualified wages paid between March 12, 2020 and December 31, 2020.

At the end of last year Congress passed a relief bill allowing businesses that received Paycheck Protection Program (PPP) loans to also be able to claim the Employee Retention Credit (ERC). The new guidance, Notice 2021-20, explains how employers that received a PPP loan can claim the ERC.

Qualified wages for which an employer claims the ERC are excluded from payroll costs paid during the covered period that qualify for forgiveness under the PPP program.[1] Potentially, an employer can utilize both and receive full forgiveness of their PPP Loan along with the full employee retention credit. 

For example, during the covered period, an employer has $80k in payroll costs, $40k in eligible expenses, and received a $100k PPL loan. In order to have a PPP loan forgiven, at least 60% of the loan proceeds must be used for payroll costs (which includes wages).  When the employer submits the loan forgiveness application they can include $60k in payroll costs and $40k in other eligible expenses. The wages included as a part of payroll costs in the loan forgiveness application are not eligible for the Employee Retention Credit.  However, the additional $20k in eligible wages ($80k-$60k) are eligible for the Employee Retention Credit. 

The notice provides guidance only as it relates to wages page in 2020. If you are considering the ERC for wages paid in 2021, further guidance is expected to be released.

[1] “Guidance on the Employee Retention Credit under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act,” Internal Revenue Service, IRS.gov, accessed March 2, 2021, (Source)