It’s Not Too Late To Claim the Employee Retention Credit (ERC) For Both 2020 and 2021
With all of the laws, incentives and credits made available for businesses due to the COVID-19 pandemic, one credit that is often overlooked is the Employee Retention Credit (“ERC”). The ERC can provide significant refundable payroll tax credits to eligible employers for both the 2020 and 2021 tax years.
It is not too late to submit a claim for the Employee Retention Credit, so be sure you are not leaving valuable dollars on the table for your business.
What Is the Employee Retention Credit?
The ERC is a fully refundable tax credit for eligible employers based on payment of qualified wages and health plan expenses. The ERC applies to qualified expenses paid after March 12, 2020 and is set to expire on December 31, 2021.
However, please note that the pending Infrastructure Investment and Jobs Act (H.R. 3684) would end the program on September 30, 2021, if passed, but has not yet been voted on in the House of Representatives as of the date of this article.
Who Is an “Eligible Employer?”
An eligible employer is any employer carrying on a trade or business during the ERC period (March 12, 2020 through December 31, 2021), that either:
a. Fully or partially suspended operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
b. Experienced a “significant decline in gross receipts” during the calendar quarter.
Fully or Partially Suspended Operation
For purposes of the ERC, a fully or partially suspended operation during any calendar quarter, means that a governmental order fully or partially suspended the trade or business.
Governmental orders include:
- An order from the city’s mayor stating that all non-essential businesses must close for a specified period;
- A State’s emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and who may travel to and work at the workplace location;
- 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; and
- An order from a local health department mandating a workplace closure for cleaning and disinfecting.
There are many factors that determine whether a business has fully or partially suspended operations. Please contact our office so we may assist you based on your unique facts and circumstances.
Significant Decline in Gross Receipts
In 2020, employers are ERC eligible for the period beginning with the first calendar quarter that gross receipts were less than 50 percent of those in the corresponding quarter in 2019. The eligibility period ends with the earlier of January 1, 2021, or the first ensuing calendar quarter where gross receipts are more than 80 percent of those in the corresponding quarter in 2019.
This significant decline in gross receipts is determined by finding the first calendar quarter in 2020 (if any) that meets the 50 percent criteria. If gross receipts decline to that extent, the employer must determine if there is a later calendar quarter in 2020 that satisfies the 80 percent criteria. If so, this signifies the termination of the significant decline and the eligibility period. If there is no quarter that satisfies these criteria, the eligibility period ends January 1, 2021.
For ERC eligibility in 2021, an employer is considered to have a significant decline for the period beginning with the first calendar quarter that gross receipts are less than 80 percent of those from the corresponding calendar quarter in 2019. The period ends with the earlier of January 1, 2022, or the first ensuing calendar quarter in which gross receipts are greater than 80 percent of those in the corresponding calendar quarter in 2019.
Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in gross receipts.
Alternatively, in 2021, employers may elect to measure the decline in gross receipts using the immediately preceding calendar quarter instead of the corresponding 2019 quarter.
Are Employers of All Sizes Eligible for Employee Retention Credits?
Yes, there is no limitation on the number of employees for ERC eligibility purposes. However, there are rules regarding the actual credit calculation.
In 2021, employers with up to 500 full-time employees, or small employers, can claim the credit on all eligible employees without regard to the actual performance of services. This is an increase from the 2020 limit of 100 full-time employees.
In 2021, employers with more than 500 full-time employees, or large employers, can only claim the ERC for employees that do not perform services. This is an increase from the 2020 limit of 100 full-time employees.
For ERC purposes, full-time equivalent employees are not included in the full-time employee limitation. However, qualified wages paid to non-full-time employees are qualified wages and are therefore eligible for ERC.
How Much Is the ERC for Eligible Employers?
The ERC calculation for 2020 and 2021 differs significantly. For 2020, the ERC is equal to 50 percent of qualified wages paid during the eligible period. A maximum of $10,000 in qualified wages per employee is allowed, resulting in a maximum ERC of $5,000 per employee, per quarter for 2020.
The ERC has been significantly expanded and allows for larger credits to employers in 2021. It will equal 70 percent of qualified wages paid during the eligible period. However, the maximum amount of qualified wages is $10,000 per employee, for a maximum ERC of $7,000 per employee, per quarter. For an employer eligible for all 2021 calendar quarters, the maximum credit is $28,000 per employee.
What Are “Qualified Wages?”
The term “qualified wages” generally means wages and qualified health plan expenses paid to employees between March 12, 2020 and January 1, 2022.
However, qualified wages also depend on the distinction between a small employer and a large employer. As noted above, qualified wages for large employers only includes wages paid to employees that are not providing services.
Qualified Health Plan Expenses for ERC
Qualified health plan expenses taken into account when determining the amount of qualified wages generally includes both the portion paid by the eligible employer and the portion paid by the employee through pre-tax salary reduction contributions.
ERC Wage Coordination With Paycheck Protection Program (PPP)
Originally, the ERC could not be claimed by an employer that received a PPP loan under the CARES Act. However, the December Consolidated Appropriations Act of 2021 retroactively provided ERC eligibility to PPP loan recipients.
Eligible employers cannot claim the ERC and receive PPP forgiveness on the same wages. Please contact our office so we may assist your business in maximizing both the ERC and your PPP forgiveness.
Contributing author: Brian J. Potter, CPA, CDA, is a tax partner at Dannible & McKee, LLP. Brian has over 15 years of experience providing tax and consulting services to a wide range of clients. He has extensive experience in individual and corporate tax planning, financial planning, multi-state taxation, research and development tax credits, New York State income tax credits and ownership transition advisory.