By now, just about everyone has heard of PPP loans, EIDL Loans, and the various grants available to employers that have been negatively impacted by COVID-19. However, there is another COVID relief program that many people don’t know about called the Employee Retention Tax Credit (ERC). It’s largely unknown because when it was first rolled out it didn’t apply to a lot of people (you couldn’t claim the credit if you got a PPP loan), but the rules have since changed. Under the new ERC rules, many businesses that were impacted by COVID are entitled to tens, or even hundreds of thousands of dollars in COVID relief funds – over and above any PPP or EIDL loans they might have already received.
So how does the Employee Retention Tax Credit work??
The ERC is what’s known as a refundable tax credit that is available to employers and applied against your payroll (not income) taxes. The maximum amount you can get is $33,000 per employee. What we mean when we say the credit is refundable is that the IRS will cut you a check for the full amount of the tax credit – even if the amount of the credit is more than the payroll taxes you paid. It’s very similar to a grant in this way. A non-refundable credit would wipe your tax bill out and carry forward, but refundable means you still get money back.
Which employers qualify for the ERC credit?
Any employer that meets any one of the following three conditions is a potential candidate for the ERC:
- The business was fully or partially suspended due to a government order, and it had more than a nominal impact on the business.
- The business experienced a significant decline in gross receipts for any one quarter in 2020 or 2021, compared with the same quarter in 2019. The definition of “significant decline” varies depending on whether the quarter you are looking at is in 2020 or 2021. To qualify for 2020, your sales would have had to go down by more than 50%. For 2021, they would have had to go down by more than 20% (compared to the same quarter in 2019).
- The business was started after February 1, 2020, and it has annual revenue of less than $1 million.
Remember – the business only has to qualify for any one of the three tests to qualify for the credit. For example, just about every sit-down restaurant would qualify for the credit under the first test due to the fact that their indoor dining capacity was limited by a government order throughout the pandemic (that’s a partial suspension). Since the restaurants meet the first test, it wouldn’t even matter if they made twice as much money during COVID as ever before – they still qualify for the credit.
How is the amount of the ERC credit calculated?
The amount of the credit is calculated based on a certain percentage of qualified wages the business paid. The exact percentage depends on the year in which the quarter you are claiming the ERC for falls in. For quarters in the calendar year 2020, the credit would be 50% of the qualified. For quarters in the 2021 calendar year, the amount of the credit is 70% of the qualified wages.
For most employers, qualified wages include wages paid to employees other than the owners of the business and their relatives – up to a certain maximum amount per employee. The maximum amount of qualified wages you can claim per employee depends on – you guessed it – which year we are dealing with. For 2020 credits, the maximum qualified wages are $10,000 per employee (total for the year). For 2021, the maximum qualified wages are $10,000 per employee, per quarter ($40,000 for the year). So, the maximum credit you can claim per employee is $5,000 for 2020 (50% of $10,000), and $28,000 for 2021 (70% of $40,000).
So, what’s the catch?
The only catch is that you cannot claim the ERC for wages that were paid using money the business got from the PPP program. So, this is where it starts to get complicated: to do it right (and get the maximum amount possible), you would have to analyze all the payroll records for the relevant quarter’s week-by-week and employee-by-employee and allocate the wages between the PPP program and the ERC program. The goal is to try and make sure you are getting 100% of your PPP loan forgiven, while also getting the biggest ERC credit possible. Because the definition of “qualified wages” is different depending on if you are talking about PPP forgiveness or ERC claims, doing the allocations could get pretty involved.
This is a huge opportunity for businesses to take the negative impact of the pandemic and turn it into a positive. If anyone has any specific questions about how this works, you are welcome to call our office at any time, free of charge.