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The Employee Retention Credit (ERC) is a refundable tax credit on certain payroll taxes that was originally created under the CARES Act to help businesses cover the cost of keeping workers employed during the pandemic. The ERC is available to trades or businesses whose activities have been subject to a total or partial suspension due to a government order, or who have experienced a significant drop in their gross receipts during the pandemic. The amount of the credit is calculated based on a percentage of the “eligible salary”, including expenses attributable to the eligible health care plan that an eligible employer pays to employees.
Who is eligible for the ERC?
The ERC is accessible to trades or companies whose activities have been the subject of a total or partial suspension of operations due to a government order, or who have suffered significant drop in gross receipts during the pandemic. Eligibility rules for calendar years 2020 and 2021 vary, as described in more detail below.
Are non-profit organizations eligible for the ERC?
Yes. for purposes of the ERC, a tax-exempt non-governmental organization described in Section 501(c) of the Internal Revenue Code that is exempt from tax under Section 501(a) of the Code is deemed be engaged in a “trade or business” with respect to all operations of the organization.
Can trades or businesses that have received a PPP loan qualify for the ERC?
Yes. Originally, employers had to choose between taking out a Paycheck Protection Program (PPP) loan or applying for the ERC. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 removed this restriction and eligible employers can apply for the ERC even if they have received one or more PPP loans. An eligible employer, however, cannot claim ERC on qualifying wages they used to obtain PPP loan forgiveness (i.e., no double deduction).
What rules apply for purposes of calculating the ERC for 2020 (IRS Notice 2021-20)?
For the 2020 calendar year, employers are eligible to claim the ERC if they operated a trade or business during the calendar year and experienced either:
1. A full or partial suspension of the operation of their trade or business during any calendar quarter due to a government order restricting trade, travel or group gatherings due to COVID-19; Where
2. A significant decline in gross revenue of more than 50% compared to the same quarter of the previous year (beginning with the calendar quarter beginning on January 1, 2020).1
The maximum amount of pensionable salary taken into account for each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer for eligible wages paid to any employee is $5,000 (50% of $10,000).
For an employer with an average of more than 100 full-time employees in 2019 (a large eligible employer), qualified wages are generally wages paid to employees who are not providing services because operations have been fully or partially suspended or due to declining gross receipts. For an employer who has on average 100 or less full-time employees in 2019 (an eligible small employer), qualified wages are generally the wages paid to all employees during a period when operations have been fully or partially suspended or during the quarter when the employer has experienced a decline in gross receipts regardless of whether employees provide services.
What rules apply for purposes of calculating the ERC for 2021 (IRS Notice 2021-23, 2021-49 and Code Section 3134)?
For the 2021 calendar year, eligible employers can claim a credit on 70% of eligible wages they pay to employees after December 31, 2020 and before October 1, 2021, up to a maximum of $10,000 per employee, per calendar quarter in 2021 (resulting in a maximum credit of $7,000 per quarter per employee – a total of $21,000 for 2021).2
As of January 1, 2021, employers can apply for the ERC if they operated a trade or business in 2021 and experienced:
1. A full or partial suspension of the operation of their trade or business for a calendar quarter due to a government order restricting trade, travel or group gatherings due to COVID-19; Where
2. A decline in gross receipts in the first, second or third calendar quarter in 2021 when gross receipts in that calendar quarter are lower more than 80% of gross receipts during the same calendar quarter in 2019.3
For the purposes of determining eligibility based on a decline in gross receipts, employers are permitted to choose to use another quarter to calculate gross receipts.4 Under this election, an employer can determine whether the gross revenue decline test is met for a calendar quarter in 2021 by comparing its gross revenue for the immediately preceding calendar quarter with that of the corresponding calendar quarter in 2019. For example:
- For the first calendar quarter of 2021, an employer may choose to use their fourth calendar quarter of 2020 gross receipts against those of the fourth calendar quarter of 2019; and
- For the second calendar quarter of 2021, an employer may choose to use their gross receipts from the first calendar quarter of 2021 against those of the first calendar quarter of 2019.
Effective January 1, 2021, for purposes of the ERC claim based on qualifying wages paid in 2021, a qualifying large employer is defined as an employer that had on average more than 500 full-time employees in 2019 (compared to 100 full-time employees).
How does the ERC affect federal income taxes (income and deduction)?
The IRS has indicated that ERC is not included in gross income for federal income tax purposes. The ERC, however, reduces the expenses that an eligible employer can otherwise deduct on their federal income tax return (i.
Is there still time to claim the ERC?
Yes. There is still time to claim ERC retroactively by filing a Form 941-X (Adjusted Quarterly Federal Employer Income Tax Return or Claim for Reimbursement).
The statute of limitations for filing amended quarterly returns is generally three years from the date Form 941 is filed. For example, in order to claim the employee retention credit for the second quarter of 2020, the amended return must be submitted before July 2023.
Employers should seek experienced legal counsel to discuss eligibility and minimize risk during the claims process. To help employers navigate the ins and outs of ERC eligibility and claims, our team of benefits lawyers have created an Employee Retention Credit Eligibility Questionnaire and Employee Retention Summary Chart. eligibility requirements below.
Click here to request your copy of the Employee Retention Credit Eligibility Questionnaire.
Footnotes
1. A significant decline in gross receipts begins on the first day of the first calendar quarter of 2020 in which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. A significant decline in receipts revenue ends on January 1, 2021 or the first calendar quarter following the calendar quarter in which the employer’s gross revenue exceeds 80% of its gross revenue for the same calendar quarter in 2019.
2. Section 80604 of the Infrastructure Act amended Code section 3134(n) to provide that employee retention credit under section 3134 applies only to wages paid after on June 30, 2021 and before October 1, 2021. Therefore, the EWC is not available for the fourth quarter of 2021.
3. Compare to 2020, where an employer is considered to have a significant decline in gross revenue in any calendar quarter in which the employer’s gross revenue is less than 50% of the same calendar quarter’s gross revenue in 2019.
4. See Section 2301(c)(2)(B) of the CARES Act, as amended by Section 207(d)(2) of the Relief Act.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
