Diving Deeper into the Employee Retention Credit
January 22, 2021 | CAA, CARES Act, Employee Retention Credit, ERC, Paycheck Protection Program, PPP
On March 27, 2020, in response to the massive economic fallout and unemployment caused by the COVID-19 pandemic, Congress passed the $2.2 trillion CARES Act. Due to the complex restrictions placed on eligibility, one of the lesser-used incentives created with the CARES Act, was the Employee Retention Credit, or “ERC”. For eligible employers, this credit amounted to $5k per employee with the intention to encourage businesses to keep employees on payroll, reducing the growth in unemployment.
On December 27th, 2020, a new $900 billion economic stimulus package, the Consolidated Appropriations Act, 2021, (the “CAA”) was signed into law. This package provided an additional round of relief measures put in place to help individuals and companies affected by the Covid-19 pandemic. One of the big boosts from this new round of relief was a major expansion to the ERC, allowing far more employers to be eligible while also increasing the dollar amount of the benefit.
What is the Employee Retention Credit?
As of 2021, the ERC is a refundable credit of up to $19,000 per employee ($5k in 2020, $7k in Q1 2021, and $7k in Q2 2021) with the purpose of encouraging businesses affected by COVID-19 to keep employees on payroll. The ERC is calculated as a percentage of wages up to a maximum of $10,000 in wages for each eligible period. The credit is 50% for 2020 and 70% for Q1 and Q2 2021.
In addition, the Families First Coronavirus Response Act (FFCRA) provides an additional refundable credit of up to $17,110 per employee using paid sick or family leave for a total potential credit of $36,000 per employee. Since both credits function in the same manner as a refundable reduction in payroll expenses, we recommend evaluating both together. Note that additional eligibility requirements apply to the FFCRA.
Who is eligible?
Both for-profit businesses and tax-exempt organizations are eligible, including colleges, universities, hospitals, business leagues, chambers of commerce, real estate boards, sports leagues, and government institutions like federal credit unions. However, eligibility restrictions exist on the number of employees and on whether the business has been impacted by COVID-19.
“Decline in revenue” OR “Full or partial shutdown” requirement
Eligible employers must either show that they’ve experienced a decline in revenue or that they have been affected by a full or partial shutdown of their operations due to a COVID-19 related government order.
The reduction in revenue requirement is a bright line rule but it varies for 2020 versus 2021.
2020 Rule – Employers must show a 50% decline in revenue when comparing any quarter in 2020 to the same quarter in 2019.
2021 Rule – Employers only need to show a 20% decline in revenue when comparing Q1 or Q2 2021 to the same quarter in 2019. In addition, employers can elect to use the prior quarter in their comparison. For example, if an employer has a 20% decline in Q4 2020 vs Q4 2019, then this decline would make the employer eligible in Q1 2021.
Note that these revenue figures are performed on an aggregate basis for all companies under common control and tax-exempt organizations must include revenue from all services and sales, regardless of purpose, function, or any exemption. Additionally, note that companies formed during or after 2019 may still be eligible but special rules apply.
Employers that don’t meet the decline in revenue requirement still have one more option, the “full or partial shutdown” requirement.
The following are examples of a “full or partial shutdown”:
An auto parts manufacturer deemed an essential business who has one or more of their suppliers required to shutdown without the ability to find a replacement supplier.
A physical therapy office that successfully switched all their patients to tele-medicine due to a government order to close their office, if they could no longer access their specialized equipment to perform physical therapy.
Restaurants and bars where the local municipality allows indoor/outdoor dining but with a requirement that customers sit 6-feet apart.
Retailers who close storefront locations due to a government order even if they continue online/pickup orders.
Hospitals that are no longer allowed to perform non-urgent medical procedures due to a government order.
Food production facilities (such as butchers, slaughterhouses, bakeries, fruit/vegetable packing, etc.) that must reduce their hours of operation due to new government ordered COVID-19 cleaning procedures.
In addition to the above, the following MAY be a “full or partial shutdown”, depending on the level of disruption to the business:
A government order requiring social distancing in retail stores creates very long lines that are highly disruptive to a business.
A deli (or grocery store or restaurant) that offers a self-serve salad bar to customers and must switch to pre-packaged options due to a government order despite this being inconsistent with its historical marketing and operations.
Limitation on number of employees
Businesses with less than 100 employees in 2020 or less than 500 employees in 2021 are eligible for the credit for all employees, if all other requirements are met. For businesses with greater than these limits, eligible employees only include those who receive a wage while not performing services.
I received a PPP loan, am I still eligible?
Yes, but not on the same dollar. This is new in the 2021 CAA and was made retroactive for 2020. To preserve forgiveness of your PPP loan, you’ll need to calculate the wages applied to the loan versus the ERC to make sure you aren’t claiming both on the same dollar of wage.
I plan to also claim the R&D credit (or the Indian Employment Credit, the Active Duty Service Member Credit, the FFCRA Credit, WOTC, Empowerment Zone Credits, etc.), am I still eligible?
Yes, but like the PPP loan limitation, you cannot claim any of these credits on the same dollar. This is truly where the complexity of this legislation comes in – you’ll want to create a schedule estimating the relative benefit of each credit and then determine the percentage of each employee’s salary per quarter that will optimally apply to each benefit to avoid any “double dipping” on the same dollar of wage.
Unlike the ERC, some of credits (like the R&D credit) may be claimed using the same dollars of wage that were forgiven under the PPP program. This adds an additional layer of complexity to the optimization of your COVID-related benefit tax planning. Thus, we recommend against quick/simple “click and go” calculations offered by some payroll providers, since the basic analysis they perform could result in the loss of these credits or even the loss of your PPP loan forgiveness.
How do I claim the credit?
The credit reduces your payroll tax liability and is claimed on your Form 941 by completing Worksheet 1. If you prefer not to wait to use the credit against your payroll tax liability, an advanced refund of the credit can also be claimed on a Form 7200. Finally, you do have the option to report an adjustment to prior quarterly employment taxes to claim the credit by filing a Form 941-X.
Give us a call
2020 was a historically difficult year for many businesses and individuals, and many of those challenges will carry into 2021. Thankfully, certain provisions have been enacted to mitigate economic losses in many cases. If your business was impacted by the COVID-19 pandemic, it is well worth your time not only to determine the full extent of the relief you are entitled to, but to partner with an experienced specialty tax professional to ensure you are claiming these benefits in accordance with each interlocking statute.