At this point, most companies are trying to put the pandemic-filled 2020 and 2021 in the past and are planning for 2022 and beyond. As you prepare for the future, it is important to also look back at the employee retention credit (ERC) for 2020 and 2021 to determine if you qualify. The ERC can provide qualifying taxpayers with significant refundable payroll tax credits for both 2020 and 2021.
Two Ways to Qualify for the Employee Retention Credit
Fully or Partially Suspended Operation
Employers that experienced a fully or partially suspended operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings, are eligible for the ERC. There are many factors that determine whether a business has fully or partially suspended operations. You will want to consult with a CPA or financial advisor to determine eligibility based on your unique facts and circumstances.
Gross Receipts Test
For the tax year 2020, employers are eligible for the ERC in any quarter in which their gross receipts were less than 50 percent of those in the same quarter in 2019. Employers will remain eligible for the ERC until the quarter following the first quarter in which gross receipts are greater than 80 percent for the same quarter in 2019. For example, if gross receipts in 2020 are 45%, 82%, 86% and 91% of those in 2019, you would be eligible for Q1 and Q2 of 2020 (until the first quarter after receipts are greater than 80 percent).
Example: ABC has gross receipts of $50,000, $150,000, $250,000 and $150,000 for quarters 1-4 of 2019 and gross receipts of $20,000, $100,000, $300,000 and $150,000 for quarters 1-4 of 2020. ABC would qualify for the ERC starting in Q1 of 2020 as their receipts declined 60 percent from Q1 of 2019. ABC would continue to qualify through the quarter in which receipts went above 80 percent of 2019’s corresponding quarter. In this case, ABC would also be eligible for Q2 and Q3 of 2020 as receipts were below the 80 percent threshold until Q3.
For the tax year 2021, employers are eligible for the ERC in any quarter in which gross receipts are less than 80 percent of those in the same quarter in 2019. Employers will remain eligible for each successive quarter in which gross receipts have declined 20 percent or more compared to the same quarter in 2019 through Q3 of 2021 (the ERC program was not renewed for Q4 of 2021). In addition, in 2021, employers can look back to the immediately preceding quarter, and if they meet the 20 percent decline in gross receipts in that previous quarter, they are automatically eligible for the current quarter. For example, if in Q4 of 2020, receipts are 30 percent less than those in Q4 of 2019, even though the taxpayer would not qualify for Q4 of 2020 based on the 2020 tests, they meet the 20 percent decline test for 2021 and would qualify for Q1 of 2021.
Example: ABC has gross receipts of $50,000, $150,000, $250,000 and $150,000 for quarters 1-4 of 2019. ABC has 2021 gross receipts of $75,000, $100,000 and $300,000 for quarters 1-3 of 2021 and $115,000 for the fourth quarter of 2020. Based on the above, ABC would be eligible for the ERC in Q1, Q2 and Q3 of 2021. They are eligible for the first quarter based on Q4 of 2020 (23 percent decline compared to 2019). They are eligible for Q2 and Q3 based on the 33 percent decline in Q2 of 2021 compared to 2019.
It is very important to note that gross receipts must be on the tax basis when you are determining eligibility. This is an item that is easily overlooked and causes many employers to believe they do not qualify as they are only looking at book receipts. For each quarter, you must adjust book receipts for all tax contract adjustments related to the work in process (WIP) schedule (i.e., non-long-term contract deferral, retainage deferrals, long-term contract adjustments, etc.).
Are All Employers Eligible?
Yes, all employers are eligible for the ERC, but there are rules regarding the calculation of the credit for those that qualify. For 2021, employers with 500 or less employees (100 or less for 2020) can claim the credit on all eligible employees. For employers with over 500 employees (100 or more for 2020), they can only claim the credit for employees that did not perform services.
How Is the Credit Calculated?
The calculation of the ERC depends on which year you are claiming the credit for. For 2020, the ERC is equal to 50 percent of each employee’s qualified wages (wages and qualified health plan expenses) paid during the eligible period. This amount is limited to a maximum of $10,000 in qualified wages per employee per year, resulting in a maximum ERC of $5,000.
The ERC was significantly expanded for 2021, allowing a credit equal to 70 percent of qualified wages paid during the eligible period. The same $10,000 limit applies, resulting in a maximum credit of $7,000, but in 2021, the limit applies to each quarter rather than the full year. This means an eligible employer may be able to receive a credit of up to $21,000 per employee for 2021.
ERC Wage Coordination With Paycheck Protection Program (PPP)
Some employers mistakenly think that they are not eligible for the ERC because they received Paycheck Protection Program (PPP) loans. Originally, the ERC could not be claimed by an employer that received a PPP loan under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, the Consolidated Appropriations Act of 2021 retroactively provided ERC eligibility to PPP loan recipients.
Although you are able to claim the ERC if you received PPP loans, employers cannot claim the ERC and receive PPP forgiveness on the same wages.
If you believe you qualify for ERC, but are unsure, or would like assistance with determining your qualifications or making sure you are not counting wages toward both ERC and PPP, please contact our office at 315-472-9127 or firstname.lastname@example.org so we may assist your business in maximizing these beneficial tax credits.