By: Justin Gubser, CPA, and Aimee Reavling, CPA
The Employee Retention Credit (ERC) is one of the most significant taxpayer relief provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act but has flown under the radar for most of the past 12 months due to its initial limitations related to the first round of the Paycheck Protection Program (PPP).
The Consolidated Appropriations Act (CAA), signed into law on December 27, 2020, not only expanded the availability of the credit to employers who had received a PPP loan but also extended and increased the maximum credit into the first half of 2021.
The ERC is a fully-refundable tax credit available to eligible employers who paid qualified wages to employees from March 13, 2020, until June 30, 2021. The ERC is a credit of up to $5,000 per employee during 2020, and up to $14,000 per employee for 2021, however determining if your company is qualified and the amount of the credit is very complex.
Below is a brief introduction to some of the most important questions in determining your company’s eligibility and the amount of the tax credit.
Are you an Eligible Employer?
- Was your business subject to a full or partial shutdown of operations due to a governmental order relating to COVID-19?
- Whether or not your business was subject to a full or partial shutdown is not as clear-cut as it may seem and is beyond the scope of this article. The IRS has released extensive guidance in the form of Frequently Asked Questions.
- Did your business experience a 50% or more decline in gross receipts in any calendar quarter of 2020 as compared to the same quarter in 2019?
- Did your business experience a 20% or more decline in gross receipts in the fourth quarter of 2020 as compared to the fourth quarter of 2019?
- Are you expecting your business to experience a 20% or more decline in gross receipts in either of the first two quarters of 2021 as compared to the same quarter in 2019?
If the answer to any of these questions could be yes, it is important to take a closer look to determine whether your business is qualified to take advantage of the Employee Retention Credit.
How much is the Employee Retention Credit?
The ERC for 2020, is equal to 50% of qualified wages (limited to $10,000 per employee in total) paid to employees from March 13, 2020, to December 31, 2020, for a maximum credit of $5,000 per employee.
For 2021, the credit is increased to 70% of qualified wages (limited to $10,000 per employee, per quarter) paid to employees between January 1, 2021, and June 30, 2021, for a maximum credit of $7,000 per employee, per quarter, or $14,000 per employee in total.
What are Qualified Wages?
Qualified wages are certain wages paid to employees, including healthcare costs, during the periods described below. The amounts that may be included as qualified wages depend on whether a business is considered a small employer or a large employer for that period.
For large employers, qualified wages only include those wages and healthcare costs paid to employees while they are not working. For small employers, any wages can qualify, whether the employee was working or not.
Size of Employer
The size of an employer is determined by the average number of a business’ full-time equivalent employees during 2019. In 2020, large employers were those that had more than 100 employees. For 2021, the rule for large employers only applies to those that had over 500 employees, thus expanding the number of businesses that could qualify as small employers.
Which payroll periods do I include?
For 2020, those eligible employers that meet the criteria due to a 50% decline in gross receipts, qualified wages include the wages paid during the quarter in which the threshold was met and all subsequent quarters until the business has a quarter in which they are back to 80% of gross receipts as compared to the quarter in 2019. The employer is eligible to take the ERC in the quarter in which the business returns to the 80% gross receipts level, even if that quarter itself does not meet the 50% decline in gross receipts test.
For 2021, those eligible employers that meet the criteria due to a 20% decline in gross receipts include only qualified wages paid during the quarter for which they met this “gross receipts test”.
For those eligible employers that had to shut down operations, qualified wages only include the wages that were paid during the part of the quarter that the business was shut down.
What if my business received a PPP loan?
There is no longer a restriction on the ERC being available to employers who didn’t receive a PPP loan. An important consideration, however, is that any wages that are used to obtain PPP loan forgiveness are not considered qualified wages for the purposes of the ERC. In short, wages cannot be used for both PPP forgiveness and ERC.
If you have not applied for PPP loan forgiveness yet, it is important to determine whether you are qualified for any ERCs prior to filling out your application and to consult your Blue & Co. advisor to properly plan for this.
If you have already applied for or received PPP loan forgiveness, it is still unclear as to whether any wages claimed as payroll costs that were above the amount needed to receive loan forgiveness will still be eligible for the ERC.
How do I claim the credit?
The credits can be claimed for 2020 by amending the quarterly form 941 for the periods that include the qualified wages.
For 2021, the credits can be claimed on timely filed Form 941s. Also, it’s possible that employers can either reduce their federal payroll tax deposits in anticipation of receiving the credit or, for those who want to receive a payment in advance from the IRS, they may submit a Form 7200.
The calculations relating to the Employee Retention Credit can be complicated and there are still many areas in which we are awaiting further guidance. However, the ERC can be beneficial to many businesses still struggling through the pandemic. It’s important that you contact your professional payroll provider or your Blue & Co. advisor to make sure that you are claiming the credits appropriately.
If you have any questions, please contact your local Blue & Co. advisor, or feel free to contact the authors:
Justin Gubser, CPA
Aimee Reavling, CPA
Attend our upcoming Webinar: Understanding the Employee Retention Credit (ERC): What You Need To Know
Join Blue & Co. on Wednesday, March 3 from 12:00 p.m. to 1:00 p.m. EST for a webinar entitled Understanding the Employee Retention Credit (ERC): What You Need To Know. In this session, you will learn more about the expansion of the Employee Retention Credit (ERC).
The panelists will discuss:
- Explanation of the credit and amounts
- Who is eligible to take the credit
- Further explanation of “suspension of operations” and “significant decline in gross receipts”
- Qualified wages and wages paid to related individuals
- The ERC’s interaction with other credits and relief such as Paycheck Protection Program (PPP) Loans, Families First Coronavirus Response Act, and Work Opportunity Tax Credit
- Tax reporting and advanced considerations