The Employee Retention Credit (ERC) was established under the CARES Act in March 2020 to provide a refundable employment tax credit to help businesses with the cost of payroll and to help keep people employed during the COVID-19 pandemic. If your business qualifies, the ERC can potentially be a very large influx of cash to help you continue to run a successful business.
There is a lot of misinformation in the media and from solicitors about how easy it is to obtain the ERC. Much of the confusion around the ERC is due to the fact that there were multiple changes made to the ERC rules since its original issuance under the Consolidated Appropriations Act, 2021 (CAA) and the American Rescue Plan Act of 2021. Calculation of the ERC is also complicated if a business used qualified wages to obtain a loan under the Paycheck Protection Program (PPP), as the same wages cannot be used for both purposes.
Some consulting companies are taking aggressive positions in determining qualifications for ERC. There are also many industry scammers who tell companies they qualify for ERC without any due diligence as to actual eligibility. To provide some clarification regarding eligibility for receipt of the ERC, we provide the following factual information:
For 2020, the maximum ERC is limited to $5,000 per employee for the calendar year. For 2021, the maximum ERC is $7,000 per employee, per quarter. For the most part, the ERC may be available for the first, second, and third quarters of 2021, which creates a total maximum 2021 ERC of $21,000 per employee, depending upon the employee’s wages and their relationship with the owners of the business. Except for rare circumstances, majority owners and their relatives’ wages are not includable qualified wages for the ERC. To determine majority shareholders, you must take attribution rules into account.
There are two main ways for an employer to qualify for the ERC:
- The business must have had a full or partial suspension of operations due to a government order related to COVID-19 (only wages paid during the shutdown are qualified wages), or
- The business had a significant decline in gross receipts during the affected periods. For the majority of our clients who operated as essential businesses during the COVID pandemic, the gross receipts test is the method used in qualifying for the ERC. For 2020, a significant decline in gross receipts is defined as having more than a 50 percent drop in a quarter of 2020 versus the same quarter in 2019. For 2021, the business must have had more than a 20 percent drop in gross receipts in the quarter compared to the same quarter in 2019. There are other qualifying factors to consider such as the size of the employer as defined by the number of employees.
Can I obtain the Employee Retention Credit if I got a Paycheck Protection Program Loan?
If eligible, you can obtain the ERC even if you received a PPP loan; however, no duplication of wages can be made in both programs. You cannot use the same wages to claim ERC if you used those wages to claim PPP forgiveness. On a similar note, you cannot use wages for ERC that you previously claimed for the qualified sick and family leave credit under the Families First Coronavirus Response Act (FFCRA).
How does receipt of the Employee Retention Credit Impact Income Tax Calculations?
Another important thing to consider is that if your business is eligible for ERC, you must reduce any income tax deduction for wages on your business’ Federal income tax return for the amount of the ERC received in the year the Credit applies. For example, if you apply for ERC in 2022 for wages paid in 2020, you will need to go back and amend your 2020 Federal business income tax return to reduce the wages by the amount of ERC obtained.
How and when do I file to obtain the Employee Retention Credit?
It is very important to determine correct eligibility and qualification before filing any amended returns to receive the ERC, as the IRS and other federal agencies are aggressively targeting businesses and individuals suspected of illegally taking advantage of COVID-19 relief programs.
Eligible businesses apply for the ERC by filing Federal Form 941-X, amended quarterly payroll tax returns for each qualifying quarter. Amended 941 forms for 2020 must be filed by April 15, 2024, and by April 15, 2025, for any 2021 calendar quarters.
There are some great resources available that provide further detail on the ERC. One such resource is the ERC 2020 versus 2021 comparison chart created by the IRS. This chart provides details on the differences between the 2020 and 2021 ERC including eligibility requirements, the percentage of wages that qualify, and maximum credits for the period for qualified wages paid.
The AICPA has also released a great resource to help address some misconceptions surrounding the ERC titled “Employee retention credit: Fact or Fiction?”
If you have questions or think you may qualify, please contact your Zinner Service Team member us and we can help!