The majority of businesses have reopened their doors, but many continue to struggle with the lasting financial hardships brought on by the pandemic. The Employee Retention Credit (ERC), an employment tax credit designed to help businesses keep employees on the payroll, is providing substantial financial relief to organizations of all sizes.
Given the current market instability and labor shortages, businesses not taking advantage of the program may be at risk of losing out on a financial advantage that - in some cases - can be substantial.
Availability Beyond PPP and 2020
Originally, under The CARES Act, ERCs could not be distributed to businesses that received a Paycheck Protection Program (PPP) loan from the Small Business Administration. However, the law now deems businesses that received a PPP loan eligible to obtain an ERC for qualified wages.
The ERC program was originally scheduled to end at the beginning of 2021, but has since been extended through the end of 2021. Even though these credits are scheduled to expire in less than six months, there is still time for eligible businesses to claim the refundable credit or reduce your employment tax deposit.
The Size Breakdown
It’s important to note that while there is no size limit on eligibility for the ERC, small and large businesses are treated differently. According to SHRM (Society for Human Resource Management):
- For employers with 100 or fewer full-time employees: All employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order.
- For employers with more than 100 full-time employees: Qualified wages are wages paid to employees when they are not providing services due to COVID-19-related circumstances.
- For 2021, the full-time employee cutoff to differentiate between small and large businesses increases from 100 to 500.
Determining Eligibility
In order for an employer to qualify for an ERC, they must fit under one of the following scenarios:
- The business was required to fully or partially suspend business operations due to orders from appropriate governmental authorities imposing restrictions that limited commerce, travel or group meetings due to COVID-19 and affected the employer's operations of its typical operations.
- The business experienced a significant decline (>50% for 2020 or >20% for 2021) in gross receipts during a calendar quarter when compared to the same calendar quarter in 2019.
Eligible businesses will receive 50% of tax credits on qualified wages up to $10,000 per employee per quarter for the entire year for 2020, and 70% of tax credits on wages up to $10,000 per employee per quarter for 2021.
Here are a few examples:
- For 2020: If a company has 30 employees, each with $10,000 worth of qualified wages, the business would receive $150,000 tax credit for the year.
- For 2021: If a company has 30 employees, each with $10,000 worth of qualified wages per quarter, the business would receive $420,000 in tax credit.
Take Action
This financial boost may potentially be the difference between a business closing down or rising above, especially as the economy evolves and your business needs to be flexible during this phase of recovery.
This is a tax credit that involves the amount of employment tax that may be refundable or may reduce the amount of employment tax required for 2021. Reach out to your CPA or tax preparer to learn how to best utilize this credit, or find more information on the IRS website.
