The employee retention credit is part of the CARES Act, Angelo Spinola, D. Scott Lindstrom and Will Vail explain.

Some good news for home care employers: Congress has expanded a COVID-19-related refundable tax credit. It is known as the employee retention credit (ERC). But there are a few changes for 2021.

The ERC was enacted as part of the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act. It 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 Jan. 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 Dec. 31, 2020, through Sept. 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 for the first three 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. 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. 

Attorneys Angelo SpinolaD. Scott Lindstrom and Will Vail are attorneys at Polsinelli, a law firm with 900 attorneys in 21 offices nationwide representing thousands of home-based care providers. Learn more about the firm’s home health, home care and hospice division and online solutions for home care.