The Coronavirus pandemic brought a myriad of changes to how businesses operate, and with that came legislation that made changes to the tax code and the credits available to businesses. One of those acts is the “Consolidated Appropriations Act, 2021” (“CAA”), which created a path for relief for a variety of businesses, health care service providers, and other entities impacted by the pandemic. One such opportunity afforded to qualified businesses is the Employee Retention Credit (“ERC”). Originally created as part of the CARES Act and strengthened as part of the CAA, the ERC still has many nuances that can be difficult for employers to navigate. In this blog, we answer some of the most frequently asked questions about this valuable credit.
- What Employers are Eligible? As a measure designed to benefit employers impacted by the pandemic, in order to qualify an organization must be carrying on a trade or operating as a business in the financial year 2020 or 2021, as well as having experienced a full or partial suspension due to the pandemic, supply chain disruptions due to vendors who experienced shutdown orders or a significant loss of gross receipts.
- What Qualifies as a “Significant Decline” in Gross Receipts? The IRS quantifies a “significant decline” differently in 2020 versus 2021, but with percentages that are based on an organization’s 2019 Gross Receipts. For 2020, the decline must be greater than 50% and for 2021, greater than 20%. In both instances, this is measured quarterly and correlates to the same quarter in 2019. An exception to this for the year 2021 is that a previous quarter could be used instead of a previous year if needed to be greater than 20%.
- Which Employees Qualify? The employees that qualify for ERC claims vary based on business size. For a small employer, the credit can be claimed on employee wages. For 2020, a “small employer” equates to 100 or fewer full-time employees, and for 2021, 500 full-time employees. For employers with full-time employees in numbers greater than 100 (2020) or 500 (2021), the credit can only be claimed on wages paid to employees for not working. Family members or employees who own a portion of the company are ineligible.
- For How Many Quarters can the ERC be Claimed? The number of quarters that can be claimed depends on the eligibility. The ERC credit is available for wages paid between 3/13/20 and 9/30/21. For startup businesses, wages paid between 7/1/21 and 12/31/21 are eligible.
- Can I Claim an ERC if I received a PPP Loan? Yes. With the changes signed into law with the CAA Act, you can now claim the ERC credit even if you had a PPP loan. We just can’t use the same dollar-for-dollar funds. When calculating your ERC qualification we take this into account.
- What Wages are Eligible, and How Much can be Claimed each Year? For ERC purposes, wages are typically defined as gross wages. The maximum rate per employee also varies by year. For 2020, a maximum of $10,000 per employee per year, and for 2021, a maximum of $10,000 per employee per quarter can be claimed. Translating into the amount that can be claimed each year, for 2020, it’s possible to receive 50% of qualified wages up to $10,000, which is equal to $5,000 per employee per year. For 2021, employers can claim 70% of qualified wages per quarter, limited to the first three quarters, for a total of $21,000 per employee.
- How is the ERC Claimed? The ERC credit is claimed by calculating the credit based on the employee wage qualifications and then amending the associated payroll tax returns.
- How long do I have to submit my ERC claim? Amended payroll tax returns can be filed within three years of filing Form 941. This means that for Q1 of 2020, you have until Q1 of 2023, and for Q1 of 2021, you have until Q1 of 2024, and so on.
- Is the ERC Credit Taxable? The ERC credit is not treated as taxable income. However, it does adjust your payroll expenses. Once you receive your refund, you will be responsible for letting your CPA know the final amount and having them correctly report the changes on your business tax returns.
- What are the Next Steps? Although the process can be complex, following a few simple steps will help you navigate the ERC:
- Fill out our Qualification form to determine if you meet the criteria
- Gather your payroll information and 941 forms so we can begin calculating your credit
- Work with our team to provide all the paperwork and detail needed.
From there, you’ll get a better understanding of what funds your organization will qualify for. Here at ERC Specialists, we’re passionate about helping small businesses navigate these difficult times and stressful processes. Contact our team for individualized help with the Employee Retention Credit, we’re here to help!