As our country shut down during the pandemic, Congress initiated several measures to provide financial assistance for business owners and individuals. We’re sure you all heard about several of these initiatives, ranging from PPP loans to stimulus checks. The one we are highlighting in this article is the Employee Retention Credit (ERC), which was originally passed in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and was later amended and extended under the Taxpayer Certainty and Disaster Tax Relief Act.
How Much is the Credit?
You are eligible to receive a refundable credit on your payroll tax return up to:
- $5,000 for each full-time equivalent employee you retained from March 13, 2020 to December 31, 2020. The credit is calculated based on 50% of the first $10,000 of qualified wages paid per employee for all qualified quarters.
- $7,000 for each retained employee from Jan 1, 2021 to June 30, 2021. The credit is calculated based on 70% of the first $10,000 of qualified wages paid per employee for all qualified quarters. Note: This benefit has only been extended for the first two quarters of 2021.
Certain taxpayers are also eligible to receive these funds in advance by filing Form 7200.
Who is Eligible for this Credit?
Employers who either:
- Were government mandated to fully or partially shut down, or
- Experienced a significant decline in gross receipts. The decline is different depending on what year the credit is being claimed.
a. For 2020: Requires a 50% reduction in gross receipts when compared to the same quarter of 2019.
b. For 2021: Requires an 80% reduction in gross receipts when compared to the same quarter of 2019.
Qualified Wages for Full-Time Employees:
The definition of ‘qualified wages’ changes depending on the year and the type of employer. Essentially, you can break out the employer type into two categories: small and large employers, represented in the table below. A full-time employee for the purpose of this credit is one who worked at least 30 hours per week or 130 hours in the month.
|Employer Type||Qualified Wages||2020 Employer Definition||2021 Employer Definition|
|Small Employer||All qualified health plan expenses and wages paid for all employees for the applicable quarter, regardless of their working status||The employer averaged 100 or fewer full-time employees in the year 2019.||The employer averaged 500 or fewer full-time employees in the year 2019.|
|Large Employer||Only qualified health plan expenses and wages paid for employees who did not work for the employer.||The employer averaged more than 100 full-time employees in the year 2019.||The employer averaged more than 500 full-time employees in the year 2019.|
Warning: You cannot include wages paid to yourself if you were self-employed, and S-corporation owners can’t include wages paid to themselves if they own more than 50% of the company. Family attributions rules also apply.
PPP Loan Caveat:
The original rules passed in the CARES act stated that employers were not allowed to receive both the PPP loan and the Employee Retention Credit. However, the amendment now allows taxpayers to receive both benefits and is retroactive to 2020. The caveat is that you cannot claim the credit for qualified wages used to forgive your PPP loan. Thus, in order to qualify for both the PPP loan and Employee Retention Credit, you will need to have qualified wages in excess of what was used for your PPP loan.
- If an employer receives a Small Business Interruption Loan under the Paycheck Protection Program, authorized under the CARES Act, then the employer is not eligible for the Employee Retention Credit.
- Wages for this credit 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 for the credit for paid family and medical leave under section 45S of the Internal Revenue Code.
- Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code for that employee.
Business Established After February 15, 2020:
Startup businesses can take the ERC even if it does not meet the other ERC eligibility tests. To qualify, the business must have been established after February 15, 2020 and have annual gross receipts of not more than $1,000,000. The recovery startup credit is capped at $50,000 per quarter, per employer.
As always, we are here to help if you have any questions.