Are you Eligible for the Employee Retention Credit?

Does the IRS really give funds?

With the Employee Retention Credit, yes!

Given the challenges facing small businesses since the COVID-19 pandemic first hit, it’s more important than ever for your business to take advantage of federal programs designed to give you a financial boost. One such program is the Employee Retention Credit, or ERC.

The ERC is a tax credit that was included in last year’s Coronavirus, Aid, Relief and Economic Security (CARES) Act as a way to help small businesses survive the economic downtown and keep their workers employed. With the ERC, businesses can either get reductions in federal employment tax deposits, or request tax-credit advances for amounts that aren’t taken care of by the deposit reductions.

If you’re not familiar with the employee retention credit, you’re not alone. The ERC has received much less attention than other COVID relief programs, such as the Paycheck Protection Program and Economic Injury Disaster Loan, because the ERC initially included restrictions that disqualified many small businesses.

When the ERC was first implemented, it was only made available to companies with 100 or fewer full-time equivalent (FTE) employees. Even businesses that qualified had to meet sometimes murky criteria regarding loss of revenue or suspended operations. What’s more, under the original plan businesses that got PPP loans could not get ERCs.

Fortunately, many of those rules have changed. Subsequent revisions to the ERC that were included in other federal stimulus programs have greatly expanded the number of businesses that can claim the credit, while also increasing the amount of money that can be claimed. Among the most important changes was that PPP loan recipients can now also apply for the ERC.

If you’re uncertain whether your business qualifies for the credit, this guide will tell you everything you need to know about what’s available with the ERC, how it works, how to qualify, and how to apply. Getting a firm understanding of what’s available for your business could help you save tens of thousands of dollars this year.

What is the Employee Retention Credit?

The Employee Retention Credit is a refundable payroll tax credit against certain employment taxes that eligible businesses are required to pay. Business owners can get immediate access to the credit by reducing the employment tax deposits they’re otherwise required to make. If your employment tax deposits aren’t enough to cover the credit, you can get an advance payment from the IRS – giving you immediate cash flow if your business has been hurt by COVID-19.

The ERC was created by the United States government as a way to encourage small businesses to keep employees on their payrolls even if they weren’t working. It provides an incentive for employers to maintain full staffs during down periods tied to COVID-19. Businesses claim the credit on qualified wages – including certain health insurance costs – that they paid to employees.

The ERC was included in the CARES Act, a $2.2 trillion stimulus package signed into law in March 2020 in response to the pandemic. It was later extended and modified by the Consolidated Appropriations Act, 2021 (CAA) in December of 2020, and modified again by the American Rescue Plan Act in March 2021.

What the Original ERC Looked Like

The first incarnation of the ERC was only available on qualified wages for businesses with 100 or fewer FTE employees, and whose operations were suspended due to COVID-related shutdown orders, or because their quarterly gross receipts declined by 50%. It wasn’t available to any business that received a Paycheck Protection Program (PPP) forgivable loan.

The credit applied to 50% of qualified wages paid up to $10,000 per employee for 2020, which means the maximum credit available for each employee was $5,000. It covered qualified wages paid after March 12, 2020, and before Jan. 1, 2021.

However, many of those original rules changed when the CAA and American Rescue Plan were passed. Following is a look at some of the new rules.

Changes Following the CAA and American Rescue Plan

Here are some of the revisions that were made to the ERC:

The ERC’s original expiration date of Dec. 31, 2020 was extended to include qualified wages paid from Jan. 1, 2021 through Dec. 31, 2021

The credit has been expanded to include businesses with 500 or fewer FTE employees, rather than those with only 100 or fewer employees. To qualify, a company’s business must still either have been fully or partially suspended due to a shutdown order, or suffered a qualifying gross receipts decline.

• The qualifying quarterly gross receipts decline was reduced to 20% from 50%.
• Disruptions in supply chain were added to the list of qualifying suspensions of operations.
• The credit percentage was increased to 70% of qualified wages up to $10,000, vs. 50% previously.
• Group health plan expenses were added under “qualified wages” even if no other wages are paid.
• The quarterly credit is now worth up to $5,000 per employee for 2020, and $7,000 per employee for 2021. The $10,000-per-employee creditable wage limit is now per quarter rather than per year.
• If an employee was furloughed, but the business continued to pay that employee’s pre-tax health benefits, the pre-tax health benefit amounts now count as qualified health expenses for the ERC calculation.

How Does the Paycheck Protection Program Impact the ERC?

It bears repeating that under the 2020 CARES Act, PPP loan recipients were not allowed to take the Employee Retention Credit, but changes to the rule now allow PPP recipients to take the ERC with respect to any wages not paid for with PPP loan proceeds. This is retroactive to the passage of the CARES Act, which means eligible employers might be entitled to refunds for payroll taxes already deposited in 2020.

To better understand the relationships between the ERC and PPP, it helps to have some background on the PPP. Here’s a quick primer:

About the PPP

The PPP is a loan program that was also included in the 2020 CARES Act. It initially earmarked $350 billion that went toward giving small businesses eight weeks of cash-flow assistance through federally guaranteed loans backed by the Small Business Administration (SBA).

The PPP was later expanded by the Paycheck Protection Program and Health Care Enhancement Act, which added an additional $310 billion in funding. Other changes, under the Paycheck Protection Program Flexibility Act, gave businesses more time to spend the funds and made it easier to get a loan fully forgiven. The stimulus package signed into law in December 2020 added another $285 billion in funding to the PPP. This package also offered a second PPP loan for qualifying businesses that used up their first PPP loans.

Differences Between the ERC and PPP

The ERC and PPP are both part of federally funded efforts to help small businesses deal with lost revenue caused by the COVID-19 pandemic. However, there are some key differences between the two. For one thing, funding is limited for the PPP, whereas the ERC is not limited by available federal funds. Any business that qualifies and applies will receive its credit

Here’s a look at some other key differences, as outlined by COS Accounting & Tax of Provo, Utah.

The ERC’s original expiration date of Dec. 31, 2020 was extended to include qualified wages paid from Jan. 1, 2021 through Dec. 31, 2021

The PPP is a forgivable loan. This means you don’t have to pay the bank back if you follow its terms, such as spending the money on payroll or rent within a two-and-a-half month window. The ERC is not a loan, but a tax credit that arrives in the form of a payment directly from the IRS.

New Rules Governing PPP Recipients and the ERC

Prior to the Consolidated Appropriations Act of 2021, employers that received PPP loans couldn’t claim the ERC. Most companies went for the PPP because it was easier to access and offered more financial relief. The PPP was calculated by multiplying monthly payroll in 2019 times 2.5, with a cap on maximum salary of $100,000, equaling up to $20,800 per employee. In contrast, the ERC only went up to $5,000 per employee.

The CAA’s Taxpayer Certainty and Disaster Tax Relief Act changed this rule retroactively, so that eligible employers that received a PPP loan in 2020 could now claim the ERC for qualified wages paid after March 12, 2020, and before Jan. 1, 2021. The one caveat is that an employer can’t claim the ERC on wages used to receive PPP loan forgiveness – a process called “double dipping.”

Changes to the PPP-ERC relationship that go into effect this year can be a little complicated, so it’s a good idea to enlist the services of a tax consultant to help out. But it’s still a good exercise to gain as much knowledge as you can about how PPP loans you might have received in 2020 are now accounted for under the new ERC rules.

According to Minnesota provider of wealth advisory, tax and consulting services, it’s not uncommon for an employer to have submitted a PPP Loan Forgiveness Application and reported only payroll costs – even though the employer also paid other eligible expenses. Many employers did this because they submitted their PPP applications when they still couldn’t claim the ERC credit. CLA provides the following Example:

Suppose Employer A received a PPP loan of $200,000. This is an eligible employer and paid $200,000 of qualified wages that would qualify for the ERC during 2020. Employer A also paid other eligible expenses of $80,000. It must report a total of $200,000 of payroll costs and other eligible expenses – with a minimum of $120,000 of those costs being payroll costs – to receive full forgiveness of its PPP loan.

Employer A submitted its PPP Loan Forgiveness Application and reported $200,000 of qualified wages as payroll costs, but did not report any of the $80,000 eligible expenses. Employer A then received a decision from the SBA forgiving the PPP loan in its entirety.

The question here is whether Employer A can use $80,000 of qualified wages to claim the ERC, since it could have used $80,000 of other eligible expenses on its PPP Loan Forgiveness Application. However, the IRS says no portion of the qualified wages reported as payroll costs can be treated as qualified wages for purposes of the ERC. In short, Employer A can’t reduce its deemed election by the amount of other eligible expenses that it could have reported on its PPP Loan Forgiveness Application.

Can you claim an ERC if you paid wages that were part of a PPP forgiveness application?

As it’s currently stated, the same wages cannot be used to claim the ERC and also support PPP loan forgiveness. Wages included in payroll costs on a PPP Loan Forgiveness Application – up to the minimum amount of payroll costs needed to support loan forgiveness – do not qualify for the ERC. However, any excess wages above the amount supporting PPP forgiveness can be included in ERC-qualified wages.

Can gross receipts include proceeds of PPP loans received during a quarter, or amounts forgiven?

The details here are fuzzy because the IRS hasn’t directly addressed it. But it can be noted that under general tax principles, loan forgiveness (even if tax-exempt) would ordinarily be included in gross receipts. Depending on certain circumstances, this might disqualify a business from ERC eligibility for specific quarters. The rules are evolving quickly here and the definite trend is they are becoming more inclusive to businesses as opposed to harder to obtain or keep. It’s clear the government’s goal is to get funds into the hands of businesses that are employing people. We are all in a wait and see, but a betting man would place his bet on both forgiveness & ability to deduct those expenses paid for with ERC funds.

Is the ERC Affected by the COVID-19 Economic Injury Disaster Loan?

The COVID-19 Economic Injury Disaster Loan (EIDL) provides financial relief to small businesses and nonprofit organizations that are experiencing a temporary loss of revenue due to the pandemic. Its purpose is to help businesses meet financial obligations and operating costs that could have been met had the disaster not occurred.

The EIDL originally was intended for businesses hurt by natural disasters, but it was expanded so that businesses impacted by COVID-19 could also get access to the funds. To be eligible, a business must show that it sustained substantial economic injury that rendered it unable to meet its obligations and pay its ordinary and necessary operating expenses. The EIDL provides the working capital needed to help small businesses impacted by a disaster survive until their normal operations resume. It is only available to small businesses when the Small Business Administration determines that the business can’t obtain credit elsewhere.

Loans of up to $500,000 are available under the EIDL program, with terms up to 30 years and fixed rates of 3.75% for businesses and 2.75% for nonprofits. Proceeds can be used for working capital and normal operating expenses.

There is no connection between the Employee Retention Credit and the EIDL, so applying for one won’t affect your ability to apply for the other.

Can You Claim the ERC Retroactively?

Yes, employers that qualify for an ERC under the new rules can claim the credit retroactively for 2020. But getting a refund for the credit might take some time. Some businesses hoped the IRS would allow them to claim the retroactive credit on their first quarter 2021 filings, but that turned out not to be the case. Instead, eligible employers that received a PPP loan in 2020 but didn’t claim the ERC must file an adjustment for their Employer’s Quarterly Federal Tax Return or Claim for Refund to correct errors for the quarter in which the employer paid qualified wages. The key for each business is to ensure they are filing correctly so as to not be declined or delay the receipt of funds by several months.

These forms can not be filed electronically, so it is required to download the paper document and mail it in to get the refund. You might face a long wait because the IRS has a backlog of returns dating to last summer, and there have been delays in getting returns and refunds processed. Retroactive ERC payments could take months to process and receive. Another potential complication is that employers must reduce their deductions for qualified wages – including qualified health plan expenses – by the amount of the ERC (excluding the employer’s deduction for its share of Social Security and Medicare taxes). If you don’t reduce the deduction for qualified wages, and subsequently file correctly to claim the ERC, you might have to file an amended return to reduce the deduction for qualified wages.

Which Businesses are Eligible for the ERC?

The ERC is available to any sole proprietorship, LLC, S-Corp, C-Corp or 1099 employee that meets eligibility requirements. Effective Jan. 1, 2021, those requirements include businesses that had fewer than 500 FTE employees as of Dec. 2020. Previously, only businesses with fewer than 100 FTE employees could apply. If an employer qualifies based on its number of employees, it must meet either of the two following criteria to get the ERC:

• A decline in gross receipts by more than 20% in any quarter, compared to the same quarter the previous year (this changed from the original rule, which required a reduction of at least 50%); or
• A full or partial suspension of operations due to government orders limiting commerce, travel, or group meetings. Keep in mind that you will only get a credit on wages paid during the part of the quarter the business was shut down.

For a little more clarity on how gross receipts differ by year, here’s a look at the different pieces of legislation:

CARES Act: Under this act, effective for 2020, an employer would qualify for the ERC if its quarterly gross receipts fell by more than 50% from the same quarter the previous year.

Consolidated Appropriations Act: Starting in 2021, an employer would qualify for the ERC if its quarterly gross receipts declined by more than 20% vs. the same quarter a year earlier.

What Happens if a Company’s Business Recovers?

If your business saw a significant pickup in revenue before the end of 2020, then you might no longer be eligible for the employee retention credit. As noted in an article on Entrepreneur, under the updated rules, a business is no longer allowed to take the ERC in the quarter immediately following a quarter when its quarterly gross receipts exceed 80% compared to the gross receipts in the same calendar quarter the previous year.

For example, suppose a business qualifies for the ERC beginning in the 2020 second quarter, and continues to qualify for the rest of the year. In the fourth quarter, however, the business’s revenue climbs by 82% compared to the same quarter in 2019. At this point, the company no longer qualifies for the ERC in fourth quarter.

What Qualifies as a Partial Suspension of Operations?

The IRS provides plenty of guidance on how an employer can determine if it suffered a partial suspension of operations due to COVID-19. 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 found that a portion of an employer’s business operations will be considered “more than nominal” under these scenarios:

• Gross receipts from that portion of the business operation are 10% or more of the total gross receipts (both determined using the gross receipts of the same calendar quarter in the previous year)
• The hours of service performed by employees in that portion of the business are 10% or more of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same prior-year calendar quarter).

Example 1: Employer F, a restaurant business, must close its restaurant to on-site dining due to a governmental order closing all restaurants, bars, and similar establishments for sit-down service. However, Employer F is allowed to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. Employer F's business operations are considered to be partially suspended because a portion of its business operations – indoor and outdoor dining service – is closed due to the governmental order.

Example 2: Same facts as Example 1, except that two months later, under a subsequent governmental order, Employer F is permitted to offer sit-down service in its outdoor space, but its indoor dining service continues to be closed. During the period in which Employer F is allowed to operate only its outdoor sit-down and carry-out service in accordance with the order, Employer F's business operations are considered to be partially suspended because, under the facts and circumstances, a more than nominal portion of its business operations – its indoor dining service -- is closed due to a governmental order. The following month, under a further governmental order, Employer F is permitted to offer indoor dining service, in addition to outdoor sit-down and carry-out service, provided that all tables in the indoor dining room must be spaced at least six feet apart. Under the facts and circumstances, the governmental order restricting the spacing of tables limits Employer F's indoor dining service capacity and has more than a nominal effect on its business operations. During this period, Employer F's business operations continue to be considered to be partially suspended because the governmental order restricting its indoor dining service has more than a nominal effect on its operations.

Example 3: Employer G, a retail business, must close its retail storefront locations due to a governmental order. The retail business also maintains a website through which it continues to fulfill online orders, and the retailer's online ordering and fulfillment system is unaffected by the governmental order. Employer G's business operations are considered to have been partially suspended due to the governmental order requiring it to close its retail store locations.

Example 4: Employer H, a hospital, is considered to be operating an essential business under a governmental order with respect to its emergency department, intensive care, and other services for conditions requiring urgent medical care. However, the governmental order treats Employer H's elective and non-urgent medical procedures as non-essential business operations and prevents Employer H from performing these services. Employer H suspends operations related to elective and non-urgent medical procedures. Although Employer H is an essential business, it is considered to have a partial suspension of operations due to the governmental order that prevents it from performing elective and non-urgent medical procedures.

Example 5: Employer I, a grocery store, is considered to be operating an essential business under a governmental order. However, the governmental order requires grocery stores to discontinue their self-serve offerings, such as salad bars, though they may offer prepared or prepackaged food. Employer I modifies its operations to close its salad bar and other self-serve offerings and instead offers prepackaged salads and other items. The governmental order requiring Employer I to discontinue its self-serve offerings does not have more than a nominal effect on Employer I's business operations under the facts and circumstances, even though Employer I was required to modify its business operations. Employer I's business operations are not considered to be partially suspended because the governmental order requiring closure of self-serve offerings does not have more than a nominal effect on its business operations.

Example 6: Employer J, a large retailer, is required to close its storefront location due to a governmental order, but is permitted to provide customers with curbside service to pick up items ordered online or by phone. During this period, Employer J's business operations are considered to have been partially suspended due to the governmental order requiring it to close its storefront location. Two months later, under a subsequent governmental order, Employer J is permitted to reopen its storefront location. Under the subsequent governmental order, however, Employer J must enforce social distancing guidelines that require Employer J to admit only a specified number of customers into the store per 1,000 square feet. While the governmental order results in customers waiting in line for a short period of time to enter the store during certain busy times of the week, the size of Employer J's storefront location is large enough that it is able to accommodate all of its customers after these short waits outside the store. The governmental order requiring Employer J to enforce social distancing guidelines does not have more than a nominal effect on Employer J's business operations under the facts and circumstances, even though Employer J is required to modify its business operations. During this period, Employer J's business operations are not considered to be partially suspended because the governmental order requiring enforcement of social distancing guidelines does not have more than a nominal effect on its operations.

Suppliers to Essential Businesses

Operational suspensions can also apply to companies that supply essential businesses, such as health-care providers, energy companies, transportation providers, and food producers. An employer with an essential business can be considered to have a full or partial suspension of operations if its suppliers can’t make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations.

If the facts and circumstances indicate that the essential business's operations are fully or partially suspended as a result of its inability to obtain critical goods or materials from suppliers that were required to suspend operations, then the essential business would be eligible to receive the Employee Retention Credit. Here’s an example from the IRS website:

Example: Employer A operates an auto parts manufacturing business that is considered an essential trade or business in the jurisdiction where it operates. Employer A's supplier of raw materials is required to shut down its operations due to a governmental order. Employer A is unable to procure these raw materials from an alternate supplier. As a consequence of the suspension of Employer A's supplier, Employer A is not able to perform its operations. Under these facts and circumstances, Employer A would be considered an Eligible Employer because its operations have been suspended as a result of the governmental order that suspended operations of its supplier.

Remote or Teleworking

Remote working, which the IRS refers to as teleworking, has been a major trend in the business world since the COVID-19 pandemic began more than a year ago. The IRS actually addressed teleworking as soon as the ERC was signed into law. The agency’s position at the time was that if a governmental order required an employer to close its workplace, but the employer was able to continue comparable operations by requiring employees to telework, the employer was not considered to have a full or partial suspension of operations. The IRS later provided more clarity on which factors should be considered when determining if an employer can continue comparable operations by having employees work remotely. According to the European American Chamber of Commerce, here are some of the factors to be considered.

Employer’s telework capabilities: Whether the employer has adequate support to continue operations from another location. Portability of employees’ work: Whether an employee’s work is portable or otherwise adaptable to a remote location.

Need for presence in employee’s physical workspace: This would apply to an employer, such as a manufacturer, in which special equipment is needed that can’t be accessed or operated remotely.

Transitioning to telework: If an employer didn’t previously allow telework, or only allowed a minimal amount, then an adjustment period would apply. During this period, the employer is not considered fully or partially suspended. However, if the employer experiences a significant delay in transitioning to a comparable telework – defined as two weeks by the IRS – then the employer is considered to have had a partial suspension during the transition period.

The IRS website provides the following examples of different telework situations where operations might or might not be considered fully or partially suspended:

Example 1: Employer C, a software development company, maintains an office in a city where the mayor has ordered that only essential businesses can operate. Employer C's business is not essential under the mayor's order, which requires Employer C to close its office. Prior to the governmental order, all employees at the company teleworked once or twice per week, and business meetings were held at various locations. Following the governmental order, the company ordered mandatory telework for all employees and limited client meetings to telephone or video conferences. Employer C's business operations are not considered to be fully or partially suspended by the governmental order because its business operations can continue in a comparable manner.

Example 2: Employer D operates a physical therapy facility in a city where the mayor has ordered that only essential businesses may operate. Employer D's business is not considered essential under the mayor's order, which requires Employer D to close its workplace. Prior to the governmental order, none of Employer D's employees provided services through telework. Furthermore, all appointments, administration, and other duties were carried out at Employer D's workplace. Following the governmental order, Employer D moves to an online format and is able to serve some clients remotely, but employees cannot access specific equipment or tools that they typically use in therapy, and not all clients can be served remotely. Employer D's business operations are considered to be partially suspended by the governmental order because Employer D's workplace, including access to physical therapy equipment, is central to its operations, and the business operations cannot continue in a comparable manner.

Example 3: Employer E is a scientific research company with facilities in a state where the governor has ordered that only essential businesses can operate, and conducts research in a laboratory setting and through the use of computer modeling. Employer E's business is not essential under the governor's order, which requires Employer E to close its workplace. Prior to the governmental order, Employer E's laboratory-based research operations could not be conducted remotely (other than certain related administrative tasks), and employees involved in lab-based research worked on-site. However, Employer E's computer modeling research operations could be conducted remotely, and employees engaged in this portion of the business often teleworked. Following the governmental order, all employees engaged in computer modeling research are directed to telework, and those business operations are able to continue in a comparable manner. In contrast, the employees engaged in the lab-based research cannot perform their work while the facility is closed and are limited to performing administrative tasks during the closure. Employer E's business operations are considered to be partially suspended by the governmental order because Employer E's laboratory-based research business operations cannot continue in a comparable manner.

Reduced Operating Hours

According to the IRS, an employer that reduces its operating hours due to a governmental order is considered to have partially suspended its operations, since the governmental order limited the employer's operations.

The employer might also be eligible for the ERC if it experiences a significant decline in gross receipts. For more information on what constitutes a significant decline in gross receipts, see Determining When an Employer is Considered to have a Significant Decline in Gross Receipts.

The IRS website provides this example to illustrate when reduced operating hours can make an employer eligible for the ERC:

Example: Employer K operates a food processing facility that normally operates 24 hours a day. A governmental order issued by the local health department requires all food processing businesses to deep-clean their workplaces once every 24 hours to reduce the risk of COVID-19 exposure. In order to comply with the governmental order, Employer K reduces its daily operating hours by five hours per day so that a deep cleaning may be conducted within its workplace once every 24 hours. Employer K is considered to have partially suspended its operations due to the governmental order requiring it to reduce its hours of operation.

Location Closures

Employers that operate different locations in different cities or states might be subject to different guidelines, depending on the jurisdiction. This could lead to a partial suspension of operations. For example, employers that operate a trade or business in multiple locations and are subject to state and local governmental orders limiting operations in some, but not all, jurisdictions are considered to have a partial suspension of operations.

Similarly, employers that operate a trade or business on a national or regional basis might be subject to governmental orders requiring facility closures in certain jurisdictions, but might not be subject to such a governmental order in other jurisdictions, perhaps because they are considered essential businesses in some of those jurisdictions. In this case, the employer would still be considered to have partially suspended operations and would be considered eligible for the ERC with respect to all of its operations in all locations.

Example: Employer F is a regional retail chain with operations in different states. In some jurisdictions, Employer F is subject to a governmental order to close its stores, but is permitted to provide customers with curbside service to pick up items ordered online or by phone. In other jurisdictions, Employer F is not subject to any governmental order to close its stores, or is considered an essential business permitting its stores to remain open. Employer F establishes a company-wide policy, in compliance with local and federal governmental orders and guidance, requiring the closure of all stores and operating with curbside pick-up only, even in those jurisdictions where the business was not subject to a governmental order. As a result of the governmental orders requiring closure of Employer F’s stores in certain jurisdictions, Employer F has a partial suspension of operations of its trade or business. The partial suspension results in Employer F being an Eligible Employer nationwide.

Aggregated Groups

According to IRS guidelines, all members of an aggregated group are treated as a single employer for purposes of the Employee Retention Credit. Accordingly, if a trade or business is operated by multiple members of an aggregated group, and if the operations of one member of the aggregated group are suspended by a governmental order, then all members of the aggregated group are considered to have their operations partially suspended – even if another member of the group is in a jurisdiction that is not subject to a governmental order.

Example: Employer Group G is a restaurant chain that operates a single trade or business through multiple subsidiary corporations located in various jurisdictions. Certain members of Employer Group G's operations are closed by a governmental order, while the operations of other members remain open. As a result of a governmental order causing the suspension of operations of certain of Employer Group G members, the operations of all members of Employer Group G's controlled group of corporations are treated as partially suspended due to the governmental order.

Understanding Gross Receipts

For the purposes of the Employee Retention Credit, “gross receipts” for all non-tax-exempt organizations has the same meaning as detailed under section 448(c) of the Internal Revenue Code. In this case, “gross receipts” means gross receipts of the taxable year and generally includes total sales (net of returns and allowances) and all amounts received for services.

Gross receipts might also include any income from investments, as well as from incidental or outside sources such as interest, dividends, rents, royalties and annuities – regardless of whether the money comes from normal business operations. Keep in mind that gross receipts are not typically reduced by the cost of goods sold, but are generally reduced by the taxpayer’s adjusted basis in capital assets sold.

According to the IRS, an employer can claim the ERC on qualified wages paid in 2020 if it determines that a significant decline in gross receipts occurred in 2020 – even if the determination isn’t made until after Jan. 1, 2021. As stated earlier, in this case the employer can claim the credit by filing the appropriate form to report adjustments to its employment taxes, which is typically Form 941-X.

How Much Money Do Businesses Qualify For?

The answer to how much the credit is worth depends on a couple of things – mainly when employee wages were paid. Here is a breakdown by year:

2021

For 2021, the credit is 70% of qualified wages for the allowed amount, per quarter. Each employee’s allowable wage amount is $10,000 per quarter in 2021, excluding wages paid to any owners and their family members with combined company ownership of 50% or more.

The passage of the American Rescue Plan expanded the ERC through the end of the year. Under this expanded program, employers are now eligible for employee retention credits in all four quarters, and thus can obtain $28,000 in credit per employee in 2021.

2020

For qualified wages paid between March 13, 2020 and Dec. 31, 2020, the credit is 50% of qualified wages paid during this period, up to $10,000 per employee of annual wages paid.

The maximum any employer can get as a credit per employee for 2020 is $5,000.

What are Qualified Wages?

The definition of “Qualified Wages” is different for small and large employers. For small employers, the definition includes wages as well as payments into a Qualified Health Plan per the applicable quarter. For large employers, it only includes wages and payments into a Qualified Health Plan during the periods when employees could not perform services due to Covid-19 restrictions or a decline in gross receipts.

In this case, “Qualified Health Plan Expenses” are the amounts paid or incurred by an employer to maintain a group health plan that are allocable to Qualified Wages. This amount includes employer payments, plus any employee contributions made on a pre-tax basis. The website of accounting and tax firm CohnReznick notes that even if no wages are paid but health plan coverage is provided – such as continued coverage for furloughed employees – the expenses still constitute Qualified Health Plan Expenses and fall under the umbrella of Qualified Wages.

What are the Different Eligibility Periods?

As with other elements of the ERC, the eligible periods for claiming the refundable credit vary by year. Here is a breakdown as provided by an article on the Inc. website:

First half of 2021:
Eligible employers can claim the ERC against their share of employment taxes equal to 70% of a full-time employee's qualified wages paid from Jan. 1 through June 30, 2021. The maximum ERC amount available is $7,000 per employee per quarter, or $14,000 for eligible wages paid in the first half of 2021.

Second half of 2021:
The new American Rescue Plan rules let companies claim the credit against their share of employment taxes equal to as much as $7,000 per full-time employee per quarter during the last half of the year. So, including the existing provisions, companies would qualify for up to $28,000 per employee for all of 2021.

Final year 2020:
The 2020 credit runs from March 13, 2020 through Jan. 1, 2021. Eligible companies must show a decline of more than 50% in quarterly gross receipts vs. the same quarter in 2019. As mentioned previously, the credit is 50% of qualified wages paid up to $10,000 per employee in 2020, so the maximum credit available is $5,000 per employee.

Do You Have to Pay the Credit Back?

Because the ERC is a tax credit rather than a loan, you don’t have to pay it back. Every pay period, employers withhold a certain amount of an employee’s earnings, which are the “qualified wages” referenced earlier. This money goes toward federal unemployment (or FUTA) taxes that are reported on IRS Form 940, and Social Security taxes reported on IRS Form 941 or Form 944.

The ERC and other payroll tax credits let employers keep some of these funds by reducing the federal taxes and Social Security they have to pay. If a tax credit exceeds the amount of tax an employer is required to pay, the employer can get a payment for the difference.

For example, suppose your quarterly payroll tax bill is $10,000 and you’re eligible for a $6,000 tax credit. In this case, your tax payment will be reduced to $4,000. If your tax credit is $12,000 on a tax bill of $10,000, you can get a $2,000 check.

Do You Need Audit Protection?

Getting audit protection is never a bad idea. Audit protection, also known as audit defense, gives you the peace of mind of knowing that if you do face an audit from federal, state or local tax authorities, you’ll have a team of tax professionals behind you instead of having to go it alone. These professionals are there to ensure that auditors are accountable for their decisions. Even if the audit finds that you owe money, your audit protection team will make sure you won’t have to pay more than you legally owe.

That doesn’t mean you need audit protection specifically for the ERC. But it’s certainly something to consider, given the complicated nature of the tax credit, and the changes that have been made to it over the past year.

Employee Retention Credit FAQ's

Is the ERC a loan or a grant?

Actually, it’s neither. It’s a refundable payroll tax credit against certain employment taxes that eligible businesses are required to pay.

How will I know how much I’m receiving?

After about four weeks, you will be able to log in to your IRS portal to find out the amount.

Did Congress put a limit on how much funding is available?

No. Since the ERC is a tax credit rather than a loan or grant program, there is no funding limit on it.

Should I apply for the ERC if business is growing?

It depends on how much your business is growing. As mentioned earlier, you’re no longer allowed to take the ERC in the quarter immediately following a quarter where your quarterly gross receipts exceed 80% compared to gross receipts in the same calendar quarter the previous year.

How long does it take to receive the funds?

The process typically takes at least three to four months between claiming the credit and actually receiving the money. If you are claiming the credit retroactively, it will likely take even longer.

Where does the money come from?

It is paid by the IRS.

What is the cutoff date for ERC applications?

March 31, 2022

Are expenses paid with the ERC still tax deductible?

Yes, any expenses you pay using ERC funds are still tax deductible.