The New Tax Credits – Zeroing in on the ERC
On the surface, taking the Employee Retention Credit (ERC) is four easy steps, but we all know that nothing’s really easy. This is especially true when it comes to interpreting new legislation where not all the guidance is out yet. And, to make things even more complex, there are different rules for 2020 and 2021.
All things considered, there’s still a lot we do know. Let’s break it down:
1. Determine if the company is an eligible employer
Two Ways to Tell
First, if your operations were partially or fully suspended by a government order during any calendar quarter of 2020, you’re eligible (that’s just the 2020 ERTC – there’s also an ERC for 2021, and we’ll get to that in a bit).
The second test looks at your 2020 gross receipts compared to gross receipts from the same calendar quarter from 2019. If your gross receipts from 2020 are less than 50% of the gross receipts from that same quarter in 2019, then you qualify for that quarter.
It’s important to note that you can’t double-dip with other payroll tax credits, such as the R&D tax credit or the work opportunity tax credit. You also can’t double-dip with wages you used for PPP loan forgiveness. It gets complicated pretty quickly, and there’s a definite art to taking all these other programs into consideration when calculating the ERC tax credit correctly and optimizing your tax credit benefit.
The Essentials for Essential Businesses
You might think that, by definition, an essential business couldn’t be shuttered, and so wouldn’t be eligible for the ERC. But there are cases where it does happen. For example, if your suppliers were fully or partially shut down due to a government order, and weren’t able to deliver critical supplies and materials and that affected your business, that could affect your eligibility for the ERC.
Your business could also qualify if you own multiple businesses in different industries – an example we like to use is a construction contractor who also owns a restaurant. For the most part, construction companies were designated as essential businesses and were able to keep operating – but the restaurant is another story. Since the restaurant was suspended, the construction company was affected as well – because under the rules, it’s a single employer.
Here’s another great example – you may have operations in Cincinnati and also operations in New York – where the shutdowns and related rules were very different. Your Cincinnati operations may not have been affected, but if your New York operations were shut down, under the rules for the ERC, which again views your company as a single employer, you were subject to a government shutdown and therefore are eligible. It’s important to connect all the dots so you can see the whole picture.
2. Did the employer pay qualified wages?
Under the 2020 ERC rules, the number of employees matters in determining the amount of the credit. Organizations with 100 or fewer employees may consider all wages paid to each employee. Organizations with more than 100 employees may only consider wages paid to employees who were not able to work (meaning that you paid wages, but your employees did not work, remotely or otherwise; in other words, they didn’t do anything, but you continued to pay them).
Qualified wages must be paid after March 12, 2020 and before January 1, 2021 – and healthcare plan expenses are also considered qualified wages (including healthcare expenses paid for furloughed employees).
3. Calculate the 2020 ERC Credit
Once we’ve determined whether you’re an eligible employer and if you paid qualified wages, it’s just a matter of doing the math, which is relatively straightforward. For 2020, the credit is 50% of up to $10,000 in qualifying wages.
Here’s an example: Let’s say you qualify for two quarters, and all your eligible employees are making $40,000 or more per year. For the ERC credit, you take the maximum $10,000 for wages paid in 2020 and multiply it by 50% (2 quarters, or 50% of time for the year) and your maximum credit is determined to be $5,000 per employee. That last part – per employee – is significant. Even if you have 10 employees, that’s a $50,000 credit.
4. Claim the Credit
Perhaps the simplest step in the whole process – once you know your credit calculation and have balanced the benefits versus other tax credits you may be eligible for, it’s time to claim the credit.
The 2021 ERC Calculation
Here’s an overview of the changes for the 2021 ERC calculation:
- The definition of operations suspended by government authority is expanded to include orders limiting commerce, travel, or group meetings due to COVID-19.
- Employee numbers increase to 500 or fewer (up from 100 or fewer) and more than 500 (up from more than 100).
- If the business experienced a 20% reduction in gross receipts compared to the same calendar quarter in 2019 (Not 2020!) – you also have the option to compare the immediately preceding quarter to the corresponding quarter of 2019.
- Qualified wages must be paid between January 1, 2021 and June 30, 2021.
- The maximum of qualified wages increases to $10,000 per employee per quarter with a 70% tax credit rate – for a maximum of $14,000 per employee for 2021.
Beyond the Numbers
The ERC is an incredibly powerful tool, and it’s important to be sure you understand the nuances and how it can affect your business from a holistic perspective.
There are multiple factors to consider, and our COVID-19 Advisory Team can help you determine the best solution for your business. Start by taking the ERC Quick Test, and a member of our team will evaluate your responses and contact you with recommended next steps.