The Updated Employee Retention Credit
A Payroll Tax Credit for Retaining Your Employees
What is the ERC?
To help businesses retain employees and keep them employed during the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Employee Retention Credit (ERC) for 2020. The ERC is a refundable payroll tax credit for "qualified wages" that were paid to retained full-time employees between March 13 and Dec. 31, 2020. The credit has been extended through September 30, 2021 and is retroactively available to many businesses.
Who is Eligible?
Businesses who were ordered to fully or partially shut down operations of their trade or business because of governmental orders limiting commerce, travel or group meetings due to COVID-19, OR
Businesses who experienced a decline in gross receipts by 50% during a calendar quarter in 2020 compared to the same calendar quarter in 2019
Businesses who experienced a decline in gross receipts by 20% during a calendar quarter in 2021 (for quarters 1-3) compared to the same calendar quarter in 2019.
Nonprofits are also eligible.
How much is the ERC worth for 2020?
A refundable credit of up to $5,000 for each full-time employee retained between March 13 and December 31, 2020. It is calculated as 50% of the qualified wages (up to $10,000) that an employer paid to employees between March 13, 2020 and December 31, 2020.
Example: If you retained 20 employees on your payroll between March 13 and December 31, 2020 and you paid each of them at least $10,000 during the year, you would be eligible for a $5,000 credit per employee = $100,000.
More 2020 highlights:
The Consolidated Appropriations Act (CAA) includes the following retroactive changes to the ERC. These changes apply to the period from March 13 through Dec. 31, 2020.
If your business received a Paycheck Protection Program (PPP) loan, you can claim the ERC for qualified wages not paid with proceeds from the forgiven portion of your PPP loan.
The CAA clarifies how qualifying tax-exempt organizations determine “gross receipts.”
Group healthcare expenses are considered “qualified wages.” This is true even if no other wages are paid to that employee.
How much is the ERC worth for 2021?
In 2021, the ERC credit is up to $7,000 per employee per quarter, for Q1, Q2 and Q3.
Quarters 1 and 2 are applied to Social Security and Quarter 3 is applied against Medicare.
This is calculated at 70% of qualified wages (up to $10,000) that your business paid to each employee in each quarter = up to $21,000 per employee for Q1-3 in 2021.
Example: If your business retained 20 employees on your payroll between January 1, 2021 and September 30, 2021 and you paid them at least $10,000 per quarter, you could be eligible for a $7,000 credit per employee, per quarter = up to $420,000
More 2021 highlights:
To qualify for 2021, you must have had a calendar quarter with a 20% reduction in gross receipts compared to the corresponding calendar quarter in 2019.
You can elect to measure the decline in your gross receipts using the immediately preceding calendar quarter as an alternative quarter eligibility election. (I.E. For Q1 2021 determination, you could use Q4 of 2020 over Q4 of 2019.)
If you weren't yet in business in 2019, you can use the corresponding quarters from 2020 to determine eligibility.
For 2021 the Large Employer threshhold changed from more than 100 to more than 500 employees which allows you to use a broader definition of qualified wages if you fell within that threshold. Therefore, you can count wages paid to both active (working) employees and those who did not provide services.
According to the Rescue Act, qualified wages under the ERC do not include wages used to calculate the Restaurant Revitalization Grant.
The Rescue Act provides that “severely financially distressed employers” may treat all wages paid to employees as qualified wages, regardless of the size of the employer and number of employees. A “severely financially distressed employer” is an employer that experienced a gross receipts reduction of more than 90% compared to the same quarter in 2019.
The period for IRS examination for a taxpayer taking the ERC has been extended from the usual three years to five years.
While the Infrastructure Investment and Jobs Act ended the ERC for wages paid after September 30, 2021, there are exceptions for Recovery Startup Businesses.
Startup Businesses - Recovery Startup Businesses
The ERC impacts other tax credits and relief.
An eligible employer's ability to claim the ERC is impacted by other credit and relief provisions:
A denial of double benefit disallows taxpayers from successfully claiming both the Employee Retention Credit and the Research & Development (R&D) Tax Credit.
Employees are not counted toward the ERC if the employer is allowed a Work Opportunity Tax Credit (WOTC).
Wages for the ERC do not include wages for which the employer received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act.
Wages counted for this credit can't be counted toward the credit for paid family and medical leave.
If an employer received a Small Business Interruption Loan under the Paycheck Protection Program, as authorized under the CARES Act, then the employer was not eligible for the ERC in 2020. However, the CAA changed this rule, retroactive to March 27, 2020, and borrowers of PPP loans are now eligible to claim the Employee Retention Credit. However, to the extent that an eligible employee’s wages are used to substantiate the forgiveness of a PPP loan, those same wages cannot also be used to claim the Employee Retention Credit.
The Rescue Act contained a new provision for 2020 startups that:
Were established after February 15, 2020;
Had annual gross receipts under $1 million;
Did not otherwise meet ERC eligibility tests.
The total credit amount available is limited to $50,000 per quarter.
Credits are available for Q3 and Q4 only for "Recovery Startup Businesses" under the Rescue Act.
How Can My Company Access the ERC?
First, your business will need a legal determination of eligibility, either based on:
qualifying applicable gross receipts tests, or
having experienced a more than nominal impact due to a federal, state or local governmental mandate that limited commerce, travel or gathering related to COVID-19.
Next, your business will need a calculation of the ERC for qualifying quarters. Then you will report total qualified wages and related health-insurance costs for each qualifying quarter on amended quarterly employment tax returns, which will be Form 941-X for most employers.
Upon receipt of your claim, the IRS processes the request for refund. Processing times at the IRS vary by size of claim.
Contact us for help to capture the ERC.
Calculating the Employee Retention Credit can be time-consuming and labor-intensive. Substantiating this credit involves reviewing payroll and financial records as well as any mandated closures that have impacted your business. And for businesses, taking advantage of other tax credits and government relief, the ERC requires consideration as to which tax credits are the most beneficial.
Contact us at 214.414.9881 to discover how your business can maximize these tax credits!