What is the ERC?
ERC stands for the Employee Retention Credit. It provides a refundable tax credit to help businesses offset the cost of keeping staff employed. You must meet specific criteria to be able to take the credit as stated in the Consolidated Appropriates Act, and it gets tricky to follow all the rules. We have prepared flowcharts for 2020, Q1 and Q2 2021, and Q3 and Q4 2021 to help you. We are here to help you at any step of the journey to prepare this credit!
If eligible, recipients of the ERC may:
- For tax year 2020: Receive a credit of up to 50% of each employee’s qualified wages up to $10,000 per year, for a maximum credit of $5,000 per employee for the year. You can also consider group health plan expenses as qualified wages, even if no other wages were paid to an employee.
- For tax year 2021: Receive a credit of up to 70% of each employee’s qualified wages up to $10,000 per quarter, for a maximum credit of $7,000 per employee per quarter. You can also consider group health plan expenses as qualified wages, even if no other wages were paid to an employee.
Am I eligible?
As with all IRS rules and regulations, the only clear answer is “it depends.” First, you must ascertain if you are considered part of an aggregate or controlled group. What does this mean? If you have more than one company, look at the ownership. A parent-subsidiary controlled group of corporations is where the common parent corporation owns more than 50% of the total stock of the subsidiary corporations by either vote or value. A brother-sister controlled group is where: (1) five or fewer persons (individuals, estates, trusts) own at least 80% of each company by either vote or value; and (2) the common owners have identical ownership of more than 50% by either vote or value. If you are considered to be part of an aggregate group, either a parent-subsidiary or a brother-sister, you cannot look at each individual company to see if you qualify. You must look at all companies’ gross receipts and payroll costs in total and qualify based on that total. This is an area where reaching out to an expert is highly recommended.
Next, is how long have you been in business? For 2020 and 2021 qualifications, you must have been in business before February 16, 2020, to be eligible. However, if you were not in business before February 16, 2020, you may still qualify in Q3 and Q4 2021.
Third, you must look at your number of full-time employees. A full-time employee for the purposes of the ERC is defined as one that in any calendar month worked at least 30 hours per week or 130 hours per month. For 2020, you must have had 100 or fewer full-time W2 employees. For all quarters of 2021, you must have had 500 or fewer full-time W2 employees.
Fourth is to check your gross receipts on the same basis in which you file your tax return. This means if you keep your books on an accrual basis but file your taxes on a cash basis, you will need to convert your gross receipts to a cash basis to see if you qualify. For 2020, your gross receipts must be 50% or less when compared to the same calendar quarter in 2019. For 2021, your gross receipts must be 80% or less when compared to the same calendar quarter in 2019. This means you need a 20% reduction in gross receipts to qualify for 2021.
What if your gross receipts were not under the above thresholds? You may still qualify. If your business was subject to a full or partial shutdown order in the quarter being compared and you continued to pay out wages to your employees during this shutdown, you are eligible to claim the ERC for the period you were under a full or partial shutdown order. This is true for 2020 and 2021.
What if you weren’t in business prior to February 16, 2020? For Q3 and Q4 2021 only, if you have gross receipts under $1M, you may be eligible as a Recovery Startup Business.
You also must consider if you employ relatives in your business. If a wage is paid to a related employee of more than 50% owner, that wage is ineligible. Examples of related employees are brothers, sisters, aunts, uncles, etc. This is not an all-inclusive list.
What are Qualified Wages?
Think of this as your FICA wages. Also, consider allocable healthcare costs.
Wages paid for by PPP funds are not qualified wages. If you also claimed the FFCRA, those wages are also not included. There are also other excluded items.
I Received PPP Funds. Am I still eligible?
The short answer is possibly. The longer answer is you can take both the ERC and PPP, but PPP funds cannot be used for ERC claims. If you claimed wages for PPP forgiveness, those wages cannot be used for ERC claims. Maximizing both PPP and ERC will be vital in getting your business the maximum amount of stimulus allowed.
I’m Eligible. How do I Calculate This?
Talking to an accountant is best to determine your specific calculation. Let’s look at a simple example to try to fit all the pieces together.
Company A was in business before February 16, 2020. They employ five full-time employees in both 2020 and 2021. For ease of calculation, we will assume no PPP funds were received by Company A in either 2020 or 2021 and that benefits are not offered. Gross receipts were as follows:
This would make Company A’s Gross Receipts Test results as follows:
As you can see, Q2, Q3, and Q4 2020 gross receipts achieved were less than 50% of gross receipts earned in 2019. For 2021, Q1, Q2, Q3, and Q4, gross receipts completed were 80% or less of gross receipts achieved in 2019. This company would qualify for Q2 2020 through Q4 2021.
The table below shows wages paid during the business’s eligible period by employee:
For 2020, the maximum credit is up to 50% of each employee’s qualified wages up to $10,000 per year, for a maximum credit of $5,000 per employee for the year. The credit would be calculated as follows for Q2 2020.
Q3 2020 would be as follows.
Q4 2020 would be as follows.
For 2020, out of total wages paid of $171,000 for Q2 through Q4, Company A is eligible for a credit of $24,500.
For 2021, the maximum credit is up to 70% of each employee’s qualified wages up to $10,000 per quarter, for a maximum credit of $7,000 per employee per quarter. The credit would be calculated as follows for each quarter of 2021.
For 2021, out of total wages paid of $57,000 per quarter, Company A is eligible for a credit of $25,900 per quarter, to total $103,600 for the year.
How Do I File?
There are a few ways you can do this. If the quarter has already passed, you will need to file a 941X to amend your filed 941 to claim the credit.
If the quarter has not already passed, you can work with your payroll provider to properly file a 941 claiming the credit.
If the quarter has yet to start and you predict you will qualify, you can file a Form 7200 with the IRS to claim an advance on the credit.
Please keep in mind that there are a lot of businesses that will qualify for this credit. The IRS will do its best to get the funds being claimed back to you, but it will take an extensive amount of time for them to process the returns.
As you can see, this credit can be quite beneficial, especially when maximized with PPP funds. Look to New Life to help you maximize this potential!