Benefit from the Employee Retention Credit
- The Employee Retention Credit is a refundable tax credit still available to organizations who were adversely affected by the pandemic.
- The credit is up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for the first three calendar quarters of 2021.
The Employee Retention Credit (ERC) is a refundable tax credit that was designed to help organizations keep their employees on payroll.
The credit allows up to $5,000 per employee for 2020. For 2021 the ERC can be up to $7,000 per employee per quarter for the first three calendar quarters of 2021.
Who Qualifies for the ERC?
The ERC is available to businesses, nonprofit organizations, and specific governmental entities during a calendar quarter if they:
- Have been fully or partially suspended by government order.
- Have seen 2020 gross receipts fall below 50% of the same calendar quarter in 2019 or
- Have seen 2021 gross receipts fall below 20% of the same calendar quarter for 2019.
Fully or Partially Suspended by Government Order
A business is considered to be fully or partially suspended if an appropriate government authority-imposed restrictions limiting travel, commerce or group meetings due to COVID-19. Even if a business was allowed to operate, they could still be eligible if they weren’t allowed to operate at normal capacity. For example, a restaurant who only provided drive-thru services due to an executive order would be considered partially suspended.
Here’s what else you should know about a fully or partial suspension of operations:
- Being classified as an “essential business” does not automatically disqualify an employer from being an “eligible employer.”
- If an essential business had operations suspended due to a supplier being fully or partially suspended due to a governmental order, the essential business can be an eligible employer.
- If an employer’s workplace was closed by a governmental order for certain purposes, but the employer’s workplace could have remained open for other purposes, or the employer is able to continue certain operations remotely, the employer’s operations would be considered partially suspended.
- If on the other hand, a business could do all usual functions via “teleworking,” its operations would not have been deemed partially suspended.
- An “order from an appropriate governmental authority” includes “orders, proclamations, or decrees” but wouldn’t, for example, include statements made during a press conference.
- A governmental order limiting hours of operations for a business would constitute a partial suspension of operations.
- An employer that operates an essential business that is not required to close its physical location or otherwise suspend operations is not considered to have a full or partial suspension of its operations.
- Employers that operate a trade or business in multiple locations and are subject to state and local government orders limiting operations at some, but not all, locations are considered to have a partial suspension of operations.
- In addition to a government order being in place, a business must also meet more than nominal testing to be eligible for the ERC.
How the ERC is Calculated
The credit amount for 2020 is 50% of up to $10,000 of qualifying wages per employee for the 2020 ERC period of March 13, 2020, through December 31, 2020. In other words, the maximum credit for 2020 is $5,000 per employee.
For 2021, the credit amount is 70% of up to $10,000 of qualifying wages per employee for each eligible quarter. In other words, the maximum credit per employee is $7,000 per quarter.
Qualifying wages include not only cash compensation paid to each employee, but the allocable portion of their health care costs too.
There are some stipulations related to qualifying wages under the ERC:
- Severance payments do not qualify for the ERC.
- Wages paid for vacation, sickness, or other personal leave under a preexisting plan aren’t qualified wages for ERC for large employers because the leave time was accrued during a time when the employees were providing services.
ERC Minimum Number of Employees
For the 2020 ERC, while there is no company size restriction to qualifying for the ERC, special rules apply if the number of full-time employees (as defined in IRC section 4980H) in 2019, on average, exceeds 100. Those businesses may only compute the credit based on wages and health care paid to employees not providing services during an eligible 2020 period. If the 2019 average full-time employee count is 100 or fewer, the company is deemed to be a small employer and the credit is based on wages paid to all employees, whether they were working or not.
For the purposes of determining the 100-employee count, aggregation rules apply under IRC section 52(a) controlled group of corporations, 52(b) employees of partnerships, proprietorships, etc. under common control, 414(m) employees of an affiliated service group, or 414(o) related regulations.
Similar rules apply to the 2021 ERC. However, the number of full-time employees was raised to 500 or fewer to be deemed to be a small employer, still based on 2019 average full-time employees.
How to Claim the ERC
The ERC is taken by amending the organization’s payroll tax returns for the eligible quarters.
The ERC is different from some other COVID incentives. The credit is taxable. Guidance provides that the organization taking the credit must reduce their wage deduction on their income tax return for the year which the ERC was claimed. For example, if an organization claimed ERC for 2020, the organization may need to amend their tax return for a reduction of the wage deduction in the amount of the credit if it wasn’t captured on an originally filed income tax return.
- It’s important to understand how to account for ERC refunds when claiming the credit. Read more about the proper guidance.
ERC Filing Deadlines
There is still time to file for ERC.
- We have until April 15, 2024, to file a claim for any eligible 2020 quarter.
- We have until April 15, 2025, to file a claim for any eligible 2021 quarter.
Here’s a breakdown of the changes to the ERC across 2020 and 2021:
|2020||2021 – Q1 & Q2||2021 – Q3 & Q4|
|Time Period||March 13, 2020, to December 31, 2020||January 1, 2021, to June 30, 2021 (credit computed for each quarter)||July 1, 2021, to December 31, 2021 (credit computed for each quarter)|
|Qualified Wages||Can qualify up to $10,000 per employee||Can qualify up to $10,000 per employee|
|Maximum Credit per Employee||$5,000 aggregate||$7,000 per quarter|
|Eligible Small Employer||Less than or equal to 100 full-time employees||Less than or equal to 500 full-time employees|
|Eligibility Requirements: Decline in Gross Receipts||Gross receipts decline of greater than 50% in any quarter in 2020 vs. 2019||Gross receipts decline of greater than 20% in any quarter in 2021 vs. 2019|
|Lookback Provision for Gross Reciepts||Not applicable||Look back to the preceding quarter to meet qualification criteria|
|Governmental Instrumentalities Eligible||No||Public colleges, universities, organizations whose principal purpose is providing medical or hospital care, certain federal instrumentalities like credit unions|
|Recovery Start-up Business||Not Applicable||New category of qualified business that started 2/15/2020 or later and limited to $50,000 in credit per quarter|
|Severely Financially Distressed Employer||Not Applicable||Gross receipts down over 90% in Q3 or Q4 vs. 2019 and eligible small employer rules ignored|
|Overlapping Provisions – Don’t Double Dip!||PPP, FFCRA, WOTC, FMLA||PPP, FFCRA, WOTC, FMLA, R&D, Indian Employment, Veterans, Empowerment Zone||PPP, FFCRA, WOTC, FMLA, R&D, Indian Employment, Veterans, Empowerment Zone, SVO Grants, Restaurant Revitalization Grants|
The ERC and the Paycheck Protection Program
Changes to the Employee Retention Credit program at the end of 2020 allowed eligible employers to take the ERC in addition to the Paycheck Protection Program loan. Originally, many employers were forced to choose between the ERC and a PPP loan under the CARES Act.
Eligible employers can now claim the ERC on wages to the extent the wages were not paid with forgiven PPP loan proceeds. An eligible employer is one that has elected not to include any qualifying wages for ERC purposes “up to (but not exceeding) the minimum amount of payroll costs, together with any other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that is forgiven.”
Additionally, if any qualified wages are included on a PPP loan forgiveness application, but the loan is not forgiven, those qualified wages can be taken into account for ERC purposes.
Benefit from the Employee Retention Credit
Many companies have seen immense potential from the ERC, even years after the pandemic. Yet understanding if you qualify is just the first step. There is much to consider about how to take the credit, which employees qualify, and more. That’s why it’s important to work with a designated team to help you understand and maximize the benefit of the ERC.