The employee retention credit (ERC) was one of the CARES act’s provisions designed to alleviate the financial suffering employers have experienced due to COVID. It allows employers to claim a tax credit based on the wages paid to employees. With recent legislation, there have been updates to the act. It’s crucial for employers to know what’s changed, so let’s get into everything you need to know about the employee retention credit.
Updates to the Employee Retention Credit
The most current ERC has the same $10,000 cap; however, the percentage of those wages an employer can claim increased to 70%. This means that the maximum amount an employer can claim from qualified wages has increased from $5,000 to $7,000. This is a substantial change that will make a big difference to many employers throughout the nation.
Keep reading though, as you probably already know from your own experiences, nothing the US government throws at you is quite as simple as “here’s more money!”
Earlier updates (yes, you read that correctly, this law has been updated twice) stated that from the beginning of the year until the last day of June, 70% of wages up to $10,000, per employee, per quarter, could be claimed as a payroll tax credit. The ERC extension now covers all four quarters of 2021, allowing employers to claim 70%, per employee, per quarter, of up to $10,000 of qualified wages. That was a painful sentence for me to write, given how awkward it was. I’m sure any business owner reading this is more than familiar with how clunky legislation from the US Congress is.
There is no smoke and mirrors on this point. Check the table to see what that looks like.
|Q1 ERC Credit||$7,000||$3,500|
|Q2 ERC Credit||$7,000||$4,200|
|Q3 ERC Credit||$3,500||$7,000|
|Q4 ERC Credit||$7,000||$700|
|Total 2021 ERC Credit||$24,500||$15,400|
This expansion of the program could result in up to $28,000 in tax credits per employee for the 2021 financial year. There might be a few things to learn, but $28,000 per employee is no number to sneeze at.
Even if your payroll taxes are less than the ERC you’re claiming, you’ll see the benefit even when it exceeds your tax liability. The IRS will send you a refund for the difference, something that is sure to make many business owners happy after a challenging year.
Another notable update to the law is the change to how many employees an employer may have on their payroll to be eligible to claim the ERC. Prior iterations of the law capped the number of employees at 100, the most recent update in the American Recovery Plan has expanded that number to 500. This will help many business owners passed over for their staff’s size, particularly service industry and performing arts industry with part-time workers that could create an erroneous idea of what size business they are with the IRS.
Yes, there’s yet another update to the law. The lost revenue requirements have been notably relaxed in the most recent update. Whereas employers earlier had to demonstrate a 50% reduction in their gross revenue, now they’re only required to demonstrate a 20% reduction per quarter. What does this mean? It means that if a business had $1,000,000 in revenue for the third quarter in 2019, all they have to show in 2021 is that they earned $800,000 or less in the third quarter to be eligible for the ERC.
You can’t pick and choose quarters to suit your purpose; it has to be the same quarter from 2019, so don’t try to get too clever on that point.
I took a PPP Loan, Am I Excluded from the Employee Retention Credit?
Not anymore! Among the new laws is a clause retroactive to March 27, 2020, that allows business owners to claim the ERC in some cases! As long as you’re not claiming forgiven PPP funds, you can claim the ERC if you’ve also taken PPP funds. This is an update to the law as PPP borrowers were entirely excluded in the past.
What if I Established My Business in 2020?
Great question. The US Congress made sure to cover those business owners who might have established their business in 2020, or at some point in 2019, where they would not have one or more quarters to use for comparison when trying to calculate their reduction of income. In these cases, the employer can use their 2020 quarters for comparison or the immediately preceding quarter in cases where that is the only option. As long as they can show gross receipts of no less than $1,000,000, these startups can claim the ERC in situations in which they would otherwise be excluded.
All that said, startups can claim a maximum of $50,000 per quarter. It’s not unlimited.
What’s a Severely Financially Distressed Employer?
This is yet another new distinction created by the expansion of the ERC law. This definition, severely financially distressed employer, refers to any employer who can demonstrate a reduction in revenue of over 90% compared to the same quarter in 2019 (or 2020, if it’s a new business). In this instance, the restriction of 500 or fewer full-time employees is waived, and those employers can file for the ERC as though they had met all the requirements.
What is a Qualified Wage?
A qualified wage is any wage you have paid an employee for their labor or healthcare costs related to that employee. Healthcare costs can be included when you’re calculating qualified wages, so make sure to do a thorough assessment of any outlays you might have made to cover your employees’ healthcare. Doing so could be a difference of thousands of dollars when it comes time to pay your taxes. If you’re wondering, yes, social security and Medicaid/Medicare taxes are included in this instance.
In addition to how long the credit will be applicable, the amount employers can claim has increased. Prior iterations of the ERC capped qualified wages at $10,000, and with the Consolidated Appropriations Act of 2021, at $10,000 per quarter. Both instances limited the percentage of an employee’s wages that an employer could claim at 50%.
There are further specifications, so please pay close attention. I promise I’ve boiled it down.
Who Can Claim the Employee Retention Credit
Any employer that can demonstrate a reduction of at least 20% compared to the corresponding 2019 quarter. It’s also necessary to prove that your operations were partially or entirely limited due in some way to COVID. This shouldn’t be a big ask for anyone.
If you have less than 500 full-time employees, there are no further restrictions. If you have more than 500 employees, read the section below to see how that will affect you.
Who is Excluded from the Employee Retention Credit
There always has to be someone that misses out on relief legislation, or we wouldn’t know it came from the US Congress, right? Fortunately, the restrictions on who can claim the ERC are few and far between. The first and most easily digestible is the limit on employees. So long as none of the conditions I discussed above have been met, the employer must have less than 500 full-time employees to claim any wages paid with the ERC. If the employer has more than 500 employees, they can still claim wages paid, but only when the employee wasn’t providing any services. For example, anyone with more than 500 employees can only claim the credit if they paid their employees when the employees didn’t come to work in any way, shape, or form. This means if your employees were working remotely via zoom and email, that doesn’t count, and you can’t count those wages.
Also excluded are (with the exceptions I already discussed above) employers incapable of demonstrating a 20% or greater revenue loss compared to the corresponding 2019 quarter. If you’re doing poorly but not at a rate of 20% or greater, you can’t apply for the ERC. Sorry! I guess a line has to be drawn somewhere, and Congress picked 20%.
Purpose of the Employee Retention Credit
The purpose of the ERC is to offset losses incurred by employers as they make an effort to continue putting paychecks in their employees’ pockets. It’s one of those instances in which you might scratch your head and say, “wow, that’s actually the right thing to do. I can’t believe it was signed into law!”
History of the Employee Retention Credit
The American Rescue plan, signed into law by President Biden on March 11, 2021, strengthened and continued the ERC past the dates when it was due to expire. Where the ERC was previously going to expire on June 30, 2021, it will now continue throughout the entirety of 2021.
The ERC was a provision of the first stimulus bill known as the CARES Act, signed into law by President Trump back in March of 2020. It was a more limited provision, allowing employers to claim 50% of up to $10,000, per employee, per year.
With the second major stimulus bill wedged into the Consolidated Appropriations Act of 2021, signed into law by President Trump in December of 2020, the ERC was extended throughout the first two quarters of the 2021 fiscal year and changed the amount employees could claim from 50% of $10,000 in qualified wages, per employee, per quarter, to 70% of qualified wages, per employee, per quarter.
The recent update has extended that even further, something that is sure to bring a sigh of relief to all struggling business owners.