What is the Employee Retention Credit (“ERC”)?
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) created a refundable employee retention credit as an incentive for employers to retain their employees during the 2020 pandemic. The Employee Retention Credit (“ERC”) allows eligible employers to obtain a refundable credit against the current employer-only portion of social security taxes paid on “qualified wages” to retain workers during 2020. As of December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA, 2021”) was signed into law and the ERC was expanded into 2021. In addition, significant changes and updates were made to the ERC credit rules.
Who qualifies for the Employee Retention Credit (“ERC”)?
An employer carrying on a trade or business in 2020 is considered an “eligible employer” for the Employee Retention Credit if:
A) Their business operations were either fully suspended or at least partially suspended during any 2020 calendar quarter due to a COVID-19-related government order limiting commerce, travel, or group meetings. The IRS provides guidelines to determine whether a business is considered fully or partially or suspended, which can be seen here: https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-when-an-employers-trade-or-business-operations-are-considered-to-be-fully-or-partially-suspended-due-to-a-governmental-order-faqs
OR
B) Their business meets the “gross receipts” test. This test is satisfied if gross receipts in any 2020 calendar quarter are less than 50% of the same 2019 calendar quarter. The business remains eligible for the credit until gross receipts exceed 80% of the same 2019-calendar quarter. The sample below shows the eligibility for this test for tax year 2021.
Gross Receipts Test Example
| Quarter | 2019 Gross Receipts | 2020 Gross Receipts | YOY Percentage Decline | Eligible? |
|---|---|---|---|---|
| Q1 | $15,000,000 | $10,000,000 | 67% | No |
| Q2 | $16,000,000 | $7,000,000 | 44% | Yes* |
| Q3 | $12,000,000 | $10,000,000 | 83% | Yes* |
| Q4 | $13,000,000 | $9,000,000 | 69% | No |
* An employer is considered to have a significant decline in gross receipts for the period beginning with the first calendar quarter in 2020 for which its gross receipts are less than 50 percent of gross receipts from the same calendar quarter in 2019 and ending with the earlier of January 1, 2021 or the first calendar quarter after the quarter for which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in 2019.
How much credit benefit is available?
For 2020, the credit rate is 50% of qualified wages per eligible employee, up to $10,000 for the year. The maximum credit is $5,000 per eligible employee for the year. Qualified wages are based on the employer’s size. Employers that have 100 or less employees can take the ERC on all employees. Employers with over 100 workers can only use the credit for wages paid to employees who are not actually working due to COVID-19-related business suspension or gross receipts decline (e.g. employer furloughs).
For 2021, the credit rate is increased to 70% of qualified wages per eligible employee, and there is an increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter. Additionally, the threshold limit for employers taking the ERC on all employees was increased from 100 to 500. Refer to the chart for a summary of the significant changes.
| Key Changes | ERC Tax Year 2020 (CARES Act – March 2020) | ERC Tax Year 2021 (Consolidated Appropriations Act – December 2020) |
|---|---|---|
| Timeframe of Eligibility | Qualified wages paid from March 13, 2020 – December 31, 2020. | Qualified wages paid from January 1, 2021 – June 30, 2021 (Q1 & Q2) |
| Requirements of Eligibility | An employer whose trade or business operations are fully or partially suspended during a calendar quarter due to a governmental order is an Eligible Employer that may be entitled to the Employee Retention Credit; OR if gross receipts in any 2020 calendar quarter are less than 50% of the same 2019 calendar quarter. The business remains eligible for the credit until gross receipts exceed 80% of the same 2019 calendar quarter. | Beginning January 1st, 2021, an employer whose trade or business operations are fully or partially suspended during a calendar quarter due to a governmental order is an Eligible Employer that may be entitled to the Employee Retention Credit; OR if gross receipts in any 2021 calendar quarter are less than 80% of the same 2019 calendar quarter. The business remains eligible for the credit until gross receipts exceed 80% of the same 2019 calendar quarter. Businesses that were not in existence in 2019 could use a comparison to 2020 for purposes of the credit. Employers that were not in existence in 2019 could use a comparison to 2020 for purposes of the credit. |
| Credit Percentage Rate & Annual Maximum Credit Amount* | The tax credit is 50% of up to $10,000 in qualified wages paid to an employee. The employer's maximum credit for qualified wages paid to any employee is $5,000. Qualified wages include the cost of employer-provided health care. | Beginning January 1st, 2021, the limit on per-employee wages is increased from $10,000 for the year to $10,000 for each quarter. The credit rate is increased to 70% of qualified wages. The credit cap is increased to $7,000 per eligible employee for each of the first two quarters of 2021 for a possible $14,000 credit per employee. Qualified wages include the cost of employer-provided health care. |
| Employer Size (Small Employers vs. Large Employers) | Employers that have 100 full time equivalent (“FTE”) or less employees can take the ERC on all employees. Employers with over 100 FTE employees can only use the credit for employees who continued to receive wages but did not work because of COVID-19-related business suspension or gross receipts decline (employer furloughs). | Beginning January 1st, 2021, the employee threshold increased to 500 employees. An employer with 500 or fewer FTE employees will be eligible for the credit, even if employees are working. When calculating the 500-employee threshold, the employees of all affiliated companies sharing more the 50% common ownership are aggregated. |
| Paycheck Protection Program (“PPP”) loan | A Company could not previously qualify for both the ERC and Paycheck Protection Program (PPP) loan and were forced to choose one or the other to apply for. One important note is that when applying the disallowance rule, the employees of all affiliated companies sharing more than 50% common ownership are aggregated, so if one company in an affiliated group received a PPP loan, any other company with more than 50% common ownership was unable to claim the credit. | A Company can now claim the ERC even if they received a PPP loan. This change is effective retroactively. However, there is no double dipping, wages paid for with forgiven PPP loan proceeds are excluded from qualifying wages. Thus, assuming that the business is otherwise eligible to claim the credit, a Company that obtained a PPP loan and paid “qualified wages” in excess of the amount of the forgiven PPP loan, which is attributable to wages paid, is eligible to claim the credit. |
* Owners with greater than 50% ownership in a corporation, either directly or by attribution and/or related parties of the eligible employer (including children, parents, aunts, uncles, certain cousins, and more) may not claim the credit for their own wages. Owners who are unrelated may claim the credit against their own wages if they hold 50% or less ownership in the company.
Example of How the Credit is Calculated/Case Study
Scenario:
To illustrate how beneficial this credit may be, please refer to the following example:
A restaurant with 50 full-time employees received a Paycheck Protection Program (“PPP”) loan in 2020 and therefore did not claim the ERC during 2020. The business was partially suspended for the end of 2020 and started the 2021 year partially suspended. The business also meets the “gross receipts test” mentioned above. Each employee is paid at least $10,000 per quarter in 2020 and 2021.
2021 Calculation:
$10,000 per quarter x 50 employees = $500,000 qualified wages per quarter.
$500,000 per quarter x 70% credit = $350,000 credit per quarter.
In this example, the business may be eligible for a 2021 credit of $700,000 ($350,000 x 2 – Q1 & Q2).
The business may also retroactively file a refund claim for the credit in 2020 due to the eligibility changes to PPP loan recipients. The retroactive calculation for 2020 is the following:
2020 Calculation
$10,000 per quarter x 50 employees = $500,000 of qualified wages for entire 2020.
$500,000 per quarter x 50% credit = $250,000 credit for entire 2020.
In this example, the business may be eligible for a 2020 credit of $250,000.
Thus, as a result of the expansion and recent changes to the employee retention credit, the business may be eligible for a total refundable credit of $950,000.
How do I claim the Employee Retention Credit (“ERC”)?
Employers can claim the Employee Retention Credit for each calendar quarter on Form 941, Employer’s Quarterly Federal Tax Return. An employer can amend their Form 941 if they determine later that they qualified for the credit.
Industries Benefiting from this Credit Include:
- Sports/Entertainment
- Restaurants & Hospitality
- Private Education
- Banking
- Retail
- Healthcare
- Not-For-Profits
We recommend that you contact our team today so we can discuss how tax credits and incentives can impact your tax situation and maximize your company’s tax savings.
Dana R. Borys, An Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with start-up/emerging growth companies in the cannabis industry. Building connections beyond the code.