The ERC is open to companies or trades that were subject to a complete or partial suspension as a result of a government order or a significant drop in gross revenue during the time of the pandemic. The Employee Retention Credit (ERC) is an refunded tax credit against certain payroll taxes. It was created in the CARES Act to assist businesses in maintaining employees in the event of a pandemic. Its value is by a percent of “qualified wages,” including the allocable health plan costs which an eligible employer must pay to its employees.
Who can be eligible to be eligible for the ERC?
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The ERC is open to traders or companies that were subject to a total or partial suspension because of a governmental orderor an increase in gross revenue in the course of the pandemic. The eligibility requirements for the calendar year 2020 as well as 2021 are different and are explained in more details below.
Non-profit organizations are qualified to apply for the ERC?
ERC is tax-exempt, non-governmental entity as defined in the section 501(c) of the Internal Revenue Code that is exempt from taxation pursuant to the section 501(a) in the Code is considered to be engaging in the business of “trade or business” with regard to all the operations of the business.
Are businesses or trades that were granted the PPP loan be eligible for ERC?
Yes. In the beginning, employers had to decide between taking the Paycheck Protection Program (PPP) loan or applying for the ERC. In the year 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 abolished the requirement, and eligible employers are now able to claim the ERC even if they has taken one or more loans from PPP. A qualified employer can’t however use the ERC on the wages which it uses to obtain PPP loans that have been forgiven (i.e. there is no double-dipping).
Watch this video about the Employee Retention Credit
What are the rules that apply to the purpose of formulating an ERC in 2020 (IRS Circular 2021-20)?
For the calendar year 2020 employers can apply for the ERC in the event that they were involved in an enterprise or trade during the calendar year , and had either:
1. A total or partial suspension business of their business or trade for any calendar quarter, due to a governmental order that restricts travel, commerce or group gatherings due to COVID-19, or
2. A substantial drop in gross receipts of over 50% in comparison to the same period in the preceding period (beginning by the first calendar quarter beginning January 1st, 2020).1
Maximum amount for qualified wage that can be taken into consideration with regard to each employee during all calendar quarters is $10,000 therefore the maximum credit that an employer is eligible to receive for wages that are qualified and that are paid to employees is $5,000 (50 percent of the $10,000).
An employer with an average of more than 100 full-time workers in the year 2019 (a Large eligible employer) Qualified wages are generally the payed to employees who do not provide services due to operations were either completely or partially suspended due to a decrease in the gross earnings. If an employer had 100 or less full-time workers in the year 2019 (a small-sized eligible employer) Qualified wages are generally the wages given to all employees in the time that operations were either completely or partially suspended or in the period in which the employer saw a decrease in gross revenue, regardless of whether employees were providing services.
What are the rules for the purpose of formulating an ERC to 2021 (IRS Notices 2021-23, 2021-50 as well Code Section 3134)?
For the calendar year 2021, employers who are eligible can apply a credit of 70% of the qualified wages paid to employees on or after November 30, 2020 but by October 1, 2021 with a maximum of $10,000 limit per employee for each calendar quarter beginning in 2021 (resulting in the maximum credit amount of $7,000 per quarter for each employee – totalling $21,000 in 2021).2
Beginning 1 January 2021, employers can be eligible to claim the ERC in the event that they were operating in a business or trade between January 1 and 2021 and had either:
1. A complete or partial suspension operating of their business or trade in a calendar quarter due to the basis of a government order that restricts travel, commerce, or group gatherings due to COVID-19 or
2. A decrease in gross revenue in the second, first or third quarter of the calendar year 2021 when the gross receipts for the calendar quarter below 80% gross receipts of the previous period in 2019.3
To determine eligibility by a decrease in the gross amount of their receipts, companies are able to choose to use an alternative quarter for calculating gross receipts.4 In this case an employer can decide whether declining gross revenue requirement is satisfied for a calendar quarter beginning in 2021 by comparing the gross receipts from the preceding calendar quarter to those of the corresponding calendar quarter in the year 2019. In this case, for example:
For the first quarter in 2021 an employer can decide to utilize its gross earnings for the fourth quarter of the 2020 calendar in comparison to the fourth quarter of the calendar year 2019 and
For the second quarter in 2021 employers may decide to use the gross earnings for the first quarter of calendar 2021 in comparison to the first quarter of the calendar year 2019.
Starting 1 January 2021 for the purpose of claiming the ERC in relation to eligible wages earned in 2021, an qualified employer will be defined by one which had a median of over 500 full-time workers in 2019 (as as opposed up to 100 full-time workers).
What does the ERC impact federal income tax (income or deduction)?
The IRS has stated it is not a factor in the ERC is not counted as the gross earnings for federal tax reasons. The ERC however, can lower the amount of expenses employers that are eligible can claim on its federal tax returns (i.e. there is no deduction that is allowed for wages paid that is equal to the credit amount established for the taxable year).
Do you have time for you to apply ERC?
Yes. You have time to claim an ERC when you file a form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Demand For Refund).
The deadline to file amended quarterly reports generally is at least three years following the date you file this form. For instance, if you want to claim an Employee Retention Credit in the 2nd quarter 2020, the revised report must be filed by July 2023.
Employers should seek knowledgeable legal counsel to discuss eligibility, and to minimize risks during the claims process. In order to help employers understand the complexities regarding ERC claim and eligibility Our team of attorneys for employee benefits have created the Employee RRC Credit Questionnaire as well as a summary chart of ERC eligibility requirements. Please click here for a copy of the ERC eligibility questionnaire.