There is a great deal of activity going on now related to Employee Retention Credit (“ERC”). It seems like now is a good time to update my initial blog post on ERC 2021. A refresher on where things stand with a government program never hurts, right?
First, let’s remember that the Consolidated Appropriations Act, 2021 effectively split the ERC into two distinct programs. One program ended on December 31, 2020 and the other began on January 1, 2021. For simplicity sake, I will refer to the program ending on December 31, 2020 as “ERC2020” and the program beginning on January 1, 2021 as “ERC2021”.
It is important to point out that although the 2020 program ended you can still claim your credits.
What is the Employee Retention Credit?
The ERC is a refundable payroll tax credit that is available to business owners who meet certain criteria as laid out in the Consolidated Appropriations Act, 2021.
Eligibility Requirements and Credit Calculations
The ERC2021 program is available to those that qualify for all quarters in 2021. You will determine eligibility by looking at each quarter of 2021 individually.
Let’s walk through the requirements and calculations step by step....
Step 1: Is your business eligible?
Eligibility is achieved if gross receipts of any quarter in 2021 are less than 80% of the same quarter in 2019. If the business did not exist at the beginning of the same quarter of 2019, the business can substitute the same quarter in 2020 instead.
The Act also gives businesses the option to test eligibility by using the “immediately preceding” calendar quarter. This means that a business that doesn’t qualify based on a comparison of Q1 2021 versus Q1 2019 could use Q4 2020 versus Q4 2019 to demonstrate eligibility. This program feature should help speed up how quickly businesses in need can get much needed cash.
If the gross receipts test doesn’t work, the business could also qualify if it meets the criteria as having been fully or partially suspended during any calendar quarter in 2021 due to orders from an appropriate government authority.
What does this mean?
The operation of a trade or business is partially suspended if an appropriate governmental authority imposes restrictions on the employer’s operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the employer can still continue some, but not all of its typical operations.
There are many circumstances to be considered as it relates to partial suspension. One example from the IRS website that hits home for many businesses and Ceterus customers is as follows:
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. 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 – its indoor and outdoor dining service – is closed due to the governmental order.
Step 2: You Qualified, How Do You Calculate the Credit?
Before we get into the credit calculation, we need to understand the inputs. The most significant is qualified wages. Qualified wages are generally those wages that are included in the employee’s gross pay in the relevant quarter. Qualified wages include the Employer’s qualified health plan expenses that are properly allocable to the wages.
Simple right? It really is, but we need to work through one significant nuance. The rules are different depending on how many employees you have.
More than 500 average monthly FTEs in 2019: Wages paid to an employee to not provide services are eligible for the credit.
Less than 500 average monthly FTEs in 2019: All wages paid to an employee qualify, regardless of whether the employee is working or not.
Let’s take a look at an example. We will assume the business has less than 500 employees. I did not edit the example from my original blog post. Keep in mind that you could be eligible for the credit for all quarters in 2021.
Our sample business will qualify for the ERC2021 program in quarter one and quarter two based on the gross receipts test.
Now let’s calculate our credit. The table below shows the wages paid during the business’s eligible period by employee.
Ok, so what is my credit?
The credit for ERC2021 is 70% of qualified wages, capped at $10,000 in qualified wages per quarter (simply put, the maximum credit is $7,000 per employee, per quarter or $14,000 total). The credit in our example is $25,900. No employees were capped in this example, which differs from the ERC 2020 example we ran through on the previous blog post.
The most important consideration business owners need to think about is the interplay between the PPP program and the ERC program. We know that both programs rely heavily on payroll. PPP forgiveness has a requirement that you spend 60% of PPP loan proceeds on payroll costs in an attempt to achieve 100% forgiveness. ERC2021 is driven 100% by payroll costs. The Act disallows using the same payroll costs for PPP forgiveness and the ERC2021 program. If you received a PPP loan in 2021 and plan to participate in the ERC program, you need to make sure you consider how you will apply wages to both programs.