One of the biggest benefits to come through the COVID-19 relief provisions has been the Employee Retention Credit (ERC). It has recently gained more attention, but many taxpayers are still unaware of its rewards. The ERC is a fully refundable IRS payroll tax credit for employers and is available to a broad cross section of businesses. It has the potential for millions of dollars in savings on federal payroll taxes. The ERC had been originally overshadowed by the Paycheck Protection Program (PPP) due to a prohibition on businesses from obtaining both the ERC and PPP funds. Retroactive to 2020, the Consolidated and Appropriations Act allowed businesses that received PPP funds to still qualify for the ERC.
The maximum payroll tax credit under the ERC program is:
Tax year 2020: $5,000 per employee per annum (50% of the first $10,000 of eligible wages)
Q1, Q2 and Q3 of 2021: $7,000 per employee per quarter, which translates into a maximum credit of $21,000 per employee for 2021 (70% of the first $10,000 of eligible wages per quarter, per employee; assuming a business qualifies for the first three quarters of 2021)
In order to qualify for the ERC, a business must experience either a government-mandated full/partial suspension of operations or a significant decline in gross receipts.
Tax year 2020: A “significant decline” in gross receipts is if an employer’s gross receipts for a given quarter are less than 50% of their gross receipts for the comparable calendar quarter in 2019.
Q1, Q2 and Q3 of 2021: A “significant decline” in gross receipts is if an employer’s gross receipts for a given quarter are less than 80% of their gross receipts for the comparable calendar quarter in 2019.
For the first three quarters of 2021, an optional election is available, which allows a lookback to the prior quarter if there hasn’t been a 20% decline in gross receipts. The election allows a lookback at gross receipts of the immediately preceding calendar quarter. For instance, if in Q1 2021 a taxpayer doesn’t experience a 20% decline in gross receipts, it can elect to compare Q4 2020 gross receipts to Q4 2019 gross receipts in order to determine eligibility for Q1 2021.
For Q3 and Q4 of 2021, if a business does not meet the requirement of either suspended operations or a significant decline in gross receipts, it may still be eligible for the ERC. The American Rescue Plan Act of 2021 created a new tax provision for “recovery start-up businesses” (RSBs), which are employers that began carrying on a trade or business after Feb. 15, 2020, and had average annual gross receipts of not more than $1 million. The ERC is limited to a maximum of $50,000 in credits per quarter for RSBs.
Businesses of any size may potentially benefit from the ERC. However, there are limitations on the ERC for “large employers.” If a business is deemed to be a large employer, it can only claim the ERC for wages paid to employees not to work or employer-paid health insurance premiums for furloughed employees. A large employer for purposes of the ERC is defined as:
Tax year 2020: a business that averaged more than 100 full-time monthly employees in 2019
Tax year 2021: a business that averaged more than 500 full-time monthly employees in 2019
If a business is not deemed to be a large employer, it may potentially claim the credit for all eligible employees, whether working or not.
Eligible businesses can claim the ERC on wages that are not used toward payroll costs when applying for PPP forgiveness. Businesses should analyze their payroll costs in order to obtain 100% PPP loan forgiveness and maximize their ERC. The PPP loan forgiveness program allows businesses to report up to 40% of qualified non-payroll costs (e.g., utilities, rent) on the forgiveness application.
The ERC is claimed on the taxpayer’s timely filed IRS Form 941. In order to claim the ERC for previously filed quarters, Form 941-X must be filed. An eligible business may reduce its federal employment tax deposits by the allowable ERC amount. If the ERC exceeds the remaining federal employment tax deposits for that quarter, the business may file Form 7200 to claim an advance refund. The ERC provides an unprecedented opportunity for eligible businesses and organizations to offset revenue declines during the COVID-19 pandemic. Every business should evaluate whether it is eligible for the ERC.
About the Author: Benjamin Aspir, CPA, MST, is a senior tax manager at EisnerAmper and a member of the firm’s National Tax Group, with more than 10 years of public accounting experience. He can be reached at Benjamin.Aspir@eisneramper.com.
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