The Employee Retention Credit
Find out if your company qualifies and get up to $26,000 per employee See If You QualifyThe ERC is a refundable payroll tax credit.
In response to the adverse economic effects of the COVID-19 pandemic, the CARES Act, also known as the Coronavirus Aid, Relief, and Economic Security Act, was enacted on March 27, 2020. The Employee Retention Credit (“ERC”), which is a payroll tax credit that can be fully refunded, was established by Congress within the CARES Act to assist employers affected by the COVID-19 pandemic.
Initially, the ERC was accessible to qualified employers between March 13, 2020, and December 31, 2020. It could be as high as 50% of up to $10,000 in eligible compensation paid to an employee throughout the year, providing a potential credit amount of up to $5,000 per employee for the 2020 tax year. However, to tackle the ongoing economic effects of the COVID-19 pandemic, subsequent legislation (such as the American Rescue Plan Act, Consolidated Appropriations Act, and Infrastructure Bill) was introduced. This new legislation incorporated specific enhancements and adjustments to the ERC. The enhancements to the ERC consisted of the following:
- The extension of the ERC until September 30, 2021.
- The rise of the ERC to 70% of up to $10,000 in eligible wages paid to an employee per quarter, thus providing a possible credit amount of up to $7,000 per employee per quarter for the 2021 tax year.
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Is my business eligible for the ERC?
If one of the following requirements is true, your business qualifies:
Your business experienced a partial or complete suspension of operations. This includes:
Social distancing requirements that reduced capacity
Reduction of hours of operation
Distribution delays or suspensions
Supply chain disruptions
Suspended onsite work or client meetings
OR
Your business experienced a significant reduction in revenue during any quarter of 2020 or 2021 as compared to the same quarter of 2019.
2020: 50% decrease in revenue/quarter
2021: 20% decrease in revenue/quarter
2020
If your business meets one of these requirements, you are qualified for the ERC tax credit equal to 50% of eligible employee wages for 2020.
Maximum Credit
$5,000 per employee
If your business meets one of these requirements, you are qualified for the ERC tax credit equal to 70% of eligible employee wages for 2021.
Maximum Credit
$21,000 per employee
8 ERC myths
1) If my business is eligible for the second draw Paycheck Protection Program (“PPP”), I can't also benefit from the ERC
While it is true that the same $1 of payroll cannot be utilized towards both PPP debt forgiveness and the ERC (along with other stimulus funding), it is still possible to have sufficient payroll to allow an employer to receive both the 2021 ERC and Second Draw PPP debt forgiveness. While some might question whether a business can utilize payroll paid during the Second Draw PPP covered period, the Consolidated Appropriations Act, 2021 (“CCA 2021”) clearly states that the amendment to the PPP program is that payroll costs for PPP debt forgiveness do not include qualified wages taken into account in determining the ERC. This language allows for payroll being used during the Second Draw PPP covered period to be used for the ERC.
2) I don’t qualify for the ERC because I don’t have a significant decline in gross receipts
For purposes of the ERC, an eligible employer must be able to reflect that EITHER the business had operations that were fully or partially suspended OR experienced a significant decline in gross receipts. To be an eligible employer for the ERC, they must only meet one of these tests. It is an “OR” test.
3) My business is operating so I can't qualify as having full or partial shutdown due to governmental authority
Not so fast. There are a variety of ways that a business is considered subject to a partial shutdown. Two of the most common examples often missed are instances where operational hours are limited or where suppliers of an essential business are suspended due to governmental orders.
Governmental orders include an order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period. Any football fan used to watching NFL games at the local establishment is well aware of this rule. Living in Buffalo Bills country, where the buffalo wing was invented, it was a significant point of contention that fans could not watch the entire football game at a restaurant due to a 10:00 p.m. curfew enacted by New York State as part of COVID containment policies. Even though restaurants were operating from noon to 10:00 p.m., the inability to operate under their normal hours would be considered a partial shutdown. Therefore, the restaurants in this example would be treated as eligible employers for the ERC. The hours restriction must be due to a Federal, State, or local government mandate. A voluntary change in business hours would not be treated as a partial suspension.
While the general rule surrounding ERC for eligible employers states that essential businesses do not qualify, a significant exception to this rule is if the suppliers of the essential business are unable to make deliveries of critical goods or materials due to a governmental order that requires the supplier to suspend its operations. Therefore, if California production is shut down due to State restrictions and the Ohio manufacturer (deemed an essential business) is unable to operate normally due to the lack of material, the Ohio manufacturer could be viewed as an eligible employer for the ERC under the partial suspension guidelines as well.
4) I have to wait for my 2021 First Quarter to be completed in order to certify the company can qualify for ERC
New for 2021 ERC, the most recent legislation introduces a prior calendar quarter test when trying to assess if a significant decline in gross receipts took place. Therefore, every business can assess whether they qualify for the 2021 Q1 ERC today. If the fourth quarter receipts of 2020 declined more than than 20% when compared to the fourth quarter receipts of 2019, the employer automatically qualifies for the ERC in Q1 2021. The employer does NOT have to wait until the end of March to make this determination. The significance? The employer can access the cash related to the ERC by reducing federal employment tax deposits every pay period during the first quarter. (See Myth 7.) This can create a significant cash inflow today, as opposed to 4-6 months from now. The ability to receive part of the ERC by decreasing federal employment tax deposits may be the lifeline some companies require to survive.
5) Only small companies, with fewer than 500 employees, can qualify for the 2021 ERC
To be deemed an eligible employer, a business must prove that they have a significant decline in gross receipts OR operations that have been fully or partially suspended. That’s it! If either of those tests are met, the employer is eligible for the ERC. The number of employees will determine the amount of qualified wages the employer is able to consider when calculating the credit.
For 2021, an eligible employer that averaged 500 or fewer full-time employees in 2019 can include ANY wages (whether the employee provided a service to the business or not) when trying to determine the maximum amount of qualified wages. However, an employer that averaged greater than 500 full- time employees in 2019 can only evaluate wages paid to employees for not providing services. Sometimes this statement discourages large employers, but this requires a closer look. Remember that qualified wages include the employer’s contribution of qualified health plan expenses. Therefore, qualified health plan expenses paid by the employer for furloughed employees would be included as a qualified wage for large employers. In addition, the wages paid to employees who weren’t working full-time may also be considered.
For example, assume you continue to pay someone their full salary even though they are only working 25 hours a week. The compensation for the “non- working” 15 hours a week could be considered a qualified wage for a larger employer. Documentation surrounding these conclusions will be key.
6) The business is over 500 employees for PPP, so the business is also considered to have over 500 employees for ERC
Maybe. The rules governing employee headcount for PPP loans falls under the Small Business Administration (“SBA”) guidelines. Under SBA guidelines, an employer must calculate the average number of people employed for each pay period over the business’s latest 12 calendar months. Any person on the payroll must be included as one employee regardless of hours worked or temporary status. Therefore, regardless if an employee worked 5 hours or 40 hours, they would be counted as 1 employee for PPP.
For ERC purposes, the definition of a full-time employee is based on the Internal Revenue Code. The term full-time employee for purposes of the ERC means an employee who for a calendar month in 2019 had an average of at least 30 hours of service per week or 130 hours of service in the month, as determined in accordance with IRC §4980H. Any employee who consistently worked 30 hours per week in a month would be counted as one
employee. Employees who work part-time can be combined with the other part-time employees for the month and divided by 130 to create a full-time employee equivalent. While it can be confusing, the fact that part-time employee hours can be added together to form a full-time employee equivalent most likely will allow businesses to have fewer employees for the ERC than what they reported for PPP.
7) I must wait for my quarter payroll Form 941 to be filed in order to request the cash payment related to the ERC
This myth might be the most common assumption I hear from clients. First off, it is important to realize that the ERC is a payroll credit and not an income tax credit. The fact that the ERC is a payroll credit should allow businesses the opportunity to receive the credit, and thereby the refund, more quickly as payroll forms are filed quarterly. For example, the Form 941 for the 2021 first calendar quarter is generally due by April 30, 2021.
Taking it a step further, some businesses may not be evaluating the ERC now because they do not believe the ERC can be claimed until they file the Form 941. While that is one way to claim the ERC, businesses who need or want cash now should instead be adjusting their federal employment tax deposits by the amount of ERC reasonably expected. If businesses wait to claim the credit on their Form 941, the word on the street is that the IRS could take 4-6 months to process the refund. Many businesses can’t wait that long and are in need of the cash now.
The IRS has noted that an eligible employer that pays qualified wages in a calendar quarter will not be subject to a penalty under IRC §6656 for failing to deposit federal employment taxes.
Which leads us to our final Myth.
8) The only federal employment deposit a business can offset is the employer portion of Social Security and Medicare
The IRS has made clear that the federal employment deposit is not required if there is a reasonable expectation that an ERC is expected. The federal employment deposit includes the employee AND the employer portion of Social Security and Medicare, as well as the employee federal withholdings. Take a breath! I know this makes businesses nervous. Employees will still be credited as if the business paid the federal government the Social Security, Medicare, and withholdings. This is merely a more quick and efficient way to allow businesses to keep the cash they are due from the federal government related to ERC. As the famous saying goes, rob Peter to pay Paul.
Payroll companies are coming up to speed with these rules. They have adjusted their systems accordingly to properly record the qualified wages per employee. That being said, it appears the payroll companies will not assist the business in determining what the qualified wages are per employee. That is where assistance from your accountant or business advisor will be necessary.
It is frustrating for so many, as the rules keep changing surrounding PPP and other governmental incentives during the constant fight for businesses to survive. It is hard to keep track of all the incentives and a month after you feel you have finally understand them, the rules change again. While most of the changes in the Consolidated Appropriations Act of 2021 were welcomed, it did add a layer of complexity. This layer of complication seems to be causing businesses to delay, if not all together ignore, the new incentives. In reality, business owners are not only trying to keep their doors open, but also trying to prepare for year-end audits, tax return filings, operational decisions, and juggling all the non-work hurdles too. I get it! It is overwhelming. Take a breath and prioritize as you see fit. While prioritizing, take a hard look at the ERC. You might find that this calculation and subsequent cash savings may rise to the top of your list.
If your business meets the requirements, you could receive up to $26,000 per employee.