The answer to this question depends in part on what kind of business structure you have. The ERC is available to any sole proprietorship, LLC, S-Corp, C-Corp or 1099 employee that meets the eligibility requirements. Effective Jan. 1, 2021, those requirements include small businesses that had an average of fewer employees than 500 full-time equivalent (FTE) employees as of December 2020. When the CARES Act passed in 2020, only businesses with an average of 100 or fewer FTE employees could claim the ERC on all qualified wages paid to workers during a qualified period, but that number was expanded with later legislation. Businesses might also have qualified health plan expenses if a qualified employer partakes in a group health care plan. If an employer is qualifying based on its number of full-time employees, it must meet either of the two following criteria to get the ERC:
For a little more clarity on how the gross receipts requirement has changed, here’s a look at the different pieces of legislation:
The Internal Revenue Service provides guidance on how an employer can determine if it suffered a partial suspension of operations or significant decline of operations due to the COVID-19 pandemic. The short answer is this: If more than a “nominal portion” of an employer’s business operations are suspended by a government order, that’s considered a partial suspension. An ERC analysis by Meaden & Moore , a provider of accounting and business consulting services, found that a portion of an eligible employer’s business operations will be considered “more than nominal” under the following scenarios:
If you need more clarity, the IRS website offers numerous examples of businesses having to close or downsize certain operations due to a governmental order and how to report your income tax or employment tax on your employer's quarterly federal tax return. The following situations might not apply to your specific business, they can help shed further light.
Okay, so what happens if your business saw a big pickup in revenue before the end of 2020? In this case, your business might no longer qualify for the employee retention credit. The rules get a little complicated here. However, an article on the Entrepreneur website took a stab at explaining it. According to that article, under the updated rules, a business is no longer allowed to take the ERC in the quarter immediately following a quarter when its gross receipts exceeded 80% compared to the gross receipts in the same calendar quarter the previous year. To put it in simpler terms, let’s say a business qualifies for the maximum ERC beginning in the 2020 second quarter because its gross receipts were less than 80% compared with the same quarter a year earlier due to Coronavirus. The business continues to qualify during the third quarter for the same reason. But during the fourth quarter, its revenue climbs by 82% compared to the same quarter in 2019. At this point, the business no longer qualifies for the ERC credit. Businesses may also qualify for the Paycheck Protection Program or also known as a PPP Loan. These loans are an incentive to keep their employees on payroll for the time period. Businesses might also qualify for loan forgiveness or refundable payroll tax credit through the program as well depending on the payroll costs. It is always best for taxpayers to consult a CPA to know the basic FAQs of employee retention tax credit to ensure that your business receives maximum credit. Qualified employers also give their employees eligibility for the families first coronavirus response act which requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19.