The Employee Retention Credit (ERC) is a credit designed to help those businesses struggling with COVID related restrictions, causing a lack of income that threatens their ability to retain their employees. Originally passed as part of the Cares Act in 2020, it didn’t get much media exposure as businesses were not allowed to take advantage of both the Paycheck Protection Program (PPP) loans and the ERC. The Consolidated Appropriations Act of 2021 has changed all of that. The credit has been revived and businesses can now take the ERC and PPP loans, so now is a good time to discuss this credit, which has the potential to be very beneficial for many businesses.
Do I qualify for the Employee Retention Credit?
To be eligible for the ERC, the business had to be either fully or partially suspended, for at least one quarter in 2020 due to governmental orders OR the business had a 50% drop in Gross Receipts for a quarter in 2020 directly compared to that same quarter in 2019. Once a business qualifies they can continue to receive this credit for every quarter that the business remains below the 80% mark, compared to 2019.
For example, in quarter two of 2020, a business was at 45% Gross Revenue of what it was in quarter two of 2019. If in quarter three, the business is at 85% it would qualify in both those quarters because it met the qualification in quarter two. What is so nice about this 50% requirement is that once a business meets it in one quarter, it automatically qualifies in the second quarter. So, when a business is looking at evaluating the ERC they first want to apply the 50% calculation, as that's going to help them capitalize on this credit much more than just focusing on a full or partial suspension of business.
What qualifies as government orders?
In order to qualify, the order had to limit the business’s commerce or anything that directly impacted business operations. Restrictions in operating hours, limiting the number of customers allowed in your business, or the state requiring all non-essential business to close for a period of time are all examples of qualifying restrictions.
A good example is a restaurant that was forced to shut down. When it was allowed to open again, it was only at 30% capacity for indoor dining. The restaurant got creative and really pushed its takeout and added extra delivery options. This is still considered partially suspended. The restaurant went further and added space for outdoor dining. This is still considered partially suspended. As long as the business is not able to operate at full capacity due to governmentally imposed orders they are considered partially suspended.
How is the Employee Retention Credit Calculated?
In addition to calculating the loss in Gross Receipts for 2020, this act restores the credit until June 30, 2021. Tax exempt employers also qualify with the income being investment income (that would be dividend income and interest income), contributions, gifts and grants, and any kind of assessments or dues that you may collect.
What are qualified wages?
The calculation for qualified wages depends on the business’ average number of full-time employees during 2019. These are referred to as FTEs (Full Time Equivalents). An employee qualifies as an FTE if they have an average of 30 hours per week, or 130 hours per month.
Qualified health insurance that is paid for by the employer also qualifies, net of any premiums that the employee pays.
For 2020 up to $10,000 of wages can be counted for this credit, and the amounts can be cumulative in any quarter that the business qualifies. The credit is for 50% of that $10,000, so businesses are looking at a credit of up to $5,000 per employee. A credit is a dollar for dollar reduction of taxes, where a deduction just reduces a taxpayer’s income for calculating tax purposes, so a credit is so much better than a deduction. The payroll wages that you normally take a deduction for will need to be reduced by the credit, but the credit is still going to be a large benefit over what a business would receive from the deduction.
The rules for 2021 are slightly different. The business only needs to experience a 20% drop in Gross Revenue and a 70% aggregate of wages of $10,000. This means that instead of a $5,000 credit it would possibly be a credit of up to $7,000 per employee. In 2020, you could only use that $10,000 once but in 2021 every quarter that the business’ operations were still restricted, that same $10,000 figure applies.
If the business’ operations remain partially suspended they may qualify for the credit in both years.
Claiming the Employee Retention Credit
To file for 2020, the business should amend Forms 941 for the quarters that the business qualified. To file for 2021 the business would record this credit on their Form 941 that will be filed in quarter 1. If the business that will qualify does not wish to wait for the funds they may file Form 7200 immediately for an advance claim.
This credit could be very substantial for businesses that have been impacted by COVID related restrictions. If you’d like to see if you qualify, please contact any of our three offices.