The Employee Retention Credit (ERC) is a refundable tax credit that was made available under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in March 2020. It was designed to help employers who suffered significant impact from the COVID-19 pandemic keep employees on their payroll.

The ERC was extended and modified under the Consolidated Appropriations Act of 2021. While the credit does not cover wages paid after the end of 2021, eligible employers may still be able to claim the ERC for qualified wages paid through Quarter 3 of 2021.

How Does the Employee Retention Credit Work?

The Employee Retention Credit, also referred to as the Employee Retention Tax Credit, provides significant payroll tax credits to eligible employers to encourage them to retain workers.

The ERC is a refundable tax credit, not a loan. It can be used to offset payroll taxes, or alleviate payroll tax problems. Overpayments can be issued as a cash refund. If you qualify, you could receive as much as $5,000 per eligible employee for your 2020 claim, or as much as $21,000 for each eligible employee in 2021.

What Employers Are Eligible for the ERC?

If you are an employer that experienced a reduction in your quarterly gross receipts in 2020 or 2021 because of the pandemic, you may be eligible for the ERC. Criteria are based on your quarterly gross receipts from 2019. While benefits are enhanced for small and medium-sized businesses, large business may qualify for the credit as well. You must meet the eligibility requirements for the year in which the wages were earned to qualify for the employee retention credit.

ERC Eligibility for 2020

You must have been a private sector employer or a tax-exempt organization that did business in 2020. If you are a small business that took a small business loan, or a state or local government, you are not eligible to take the ERC for wages paid in 2020.
You must be an employer that experienced a significant decline in gross quarterly receipts in 2020 or a partial or full shutdown during any quarter that year because of government orders that limited commerce, travel, or group meetings because of COVID-19.
For 2020 claims, eligibility would begin when your business had quarterly gross receipts of less than 50% of those from the same quarter in 2019.

ERC Eligibility Rules for 2021

More than a nominal portion of your business operations must have been shut down because of the pandemic in 2021 to be eligible for the Employee Retention Credit. For ERC purposes, a partial shut down could have occurred if your business had to be closed and a portion of the work could not be performed remotely. It may have also happened if your hours of operation were reduced, or travel restrictions caused your company to suffer.
For 2021 quarters claimed, employer eligibility was expanded to include certain government employers. Those that were organizations that were tax-exempt, and were colleges and universities, or whose principal purpose was providing medical or hospital care were made eligible.
For 2021, your business would have become eligible when your quarterly gross receipts totaled less than 80% of those from the same quarter in 2019.
2021 amendments also included eligibility guidelines for recovery startup businesses that experienced a significant decline in quarterly gross receipts when comparing quarters from 2021 to the same quarters in 2020. Startups are limited to a $50,000 per quarter, however.

While most employers used the government mandate test to qualify for the ERC in 2020, the majority of employers who qualified for 2021 used the decline in gross receipts test.

How Does a PPP Loan Impact ERC Eligibility?

Many employers have expressed concerns that they may not be eligible for the Employee Retention Credit because they took a Paycheck Protection Program (PPP) loan. This simply isn’t the case. If you took a PPP loan, you may still be able to claim the credit.

Although the CARES Act initially prohibited PPP recipients from taking advantage of the credit, the Consolidated Appropriations Act amended the provision. Under the Act, PPP loan recipients are allowed to take the payroll tax credit. However, those employers who took the loan cannot claim the Employee Retention Credit on the same wages that were paid with funds from a forgiven PPP loan.

Paycheck protection program loans only applied to eight or ten weeks of wages. Funds were allowed to be used for non-wage business expenses. For ERC purposes, employers are encouraged to document the allocation of PPP funds for the 24-week period that was covered.

What Are Gross Receipts for Employee Retention Credit Purposes?

Various types of documentation will be used to determine whether your business experienced a significant decline in gross receipts for each quarter.

Determining a Decline in Gross Receipts for Taxable Entities

If your business is a taxable entity, you will need to consider:

Your total net sales for products
Payments you received for services rendered
Investment income, including rents, royalties and annuities, interest, and dividends

Your gross receipts may be reduced by your adjusted basis in property that was used in your business.

Determining a Decline in Gross Receipts if You Are Tax Exempt

If you are a non-taxable entity, you will need to consider:

All receipts from the taxable period
Your proceeds from grants
Your proceeds from investments

Your gross receipts will NOT be reduced by your adjusted basis in property your entity used in your business or trade.

Do You Qualify for the ERC Under the Government Mandate Test?

If your business experienced any of the following through September 30, 2021, you may qualify for the Employee Retention Tax Credit under the government mandate test. If:

Your business operations were fully or partially suspended because of the pandemic, you may be eligible for the Employee Retention Credit under the Cares Act.
Supply chain disruptions interfered with your ability to provide goods to your customers, or to conduct your business, you may be eligible for the credit.
Limitations on the number of workers, customers, or clients you could allow in your establishment disrupted your business, you may qualify.
The pandemic resulted in your inability to meet with vendors, conduct meetings, or attend networking events, you might be able to claim the credit.

Do you qualify for the ERC? Call Randolph Law Firm at (702) 757-7777.

How to Apply for the Employee Retention Tax Credit

If your business operations were fully or partially suspended because of the pandemic, or you experienced a qualifying decline in your quarterly gross receipts, you won’t get the Employee Retention Tax Credit automatically. You will need to apply for the refundable tax credit.

If you are behind on payroll taxes, or you did not claim the payroll tax credit when filing their original tax returns for the qualifying periods can still take advantage of the relief. If you file quarterly tax returns, you can file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund to claim the credit for the quarters in which you were eligible.

Under the Cares Act, the ERC was initially available for wages paid through December 31, 2020. The Relief Act of 2021 extended the credit for wages paid through June 30, 2021.

While the American Rescue Plan Act of 2021 initially extended the payroll tax credit through December 31, 2021, the Infrastructure Investment and Jobs Act retroactively amended the Act, limiting the ERC to eligible startup businesses for the fourth quarter of 2021. As such, most employers are ineligible to claim the Employee Retention Credit for wages that were paid after September 30, 2021.

If you are a recovery startup business, the Infrastructure Investment and Jobs Act enables you to claim the credit for wages paid after June 30, 2021, and through December 31, 2021.

Notice 2021-49 offers more information about and guidance on the ERC.

What Percentage of Wages Are Eligible for the Employee Retention Tax Credit?

The percentage of wages that are eligible for the credit depend on the quarters for which you are applying.
Claiming the Employee Retention Credit Under the Cares Act
If you are claiming the credit for wages paid between March 13, 2020, and December 31, 2020, you can receive a credit of 50% of qualified wages. You are limited to $10,000 per employee for the entire year. If your business had 100 or fewer full time employees in 2019, the wages that you paid them for providing services and not providing services are considered qualified wages. For businesses with over 100 full time workers on average in 2019, the wages paid for not providing services qualify.

Claiming the ERC Under the Relief Act

If you are claiming the credit under the Relief Act of 2021, you can receive credit for up to 70% of qualifying wages paid between January 1, 2021, and June 30, 2021. You are limited to $10,000 per employee, per quarter. Businesses with 500 or fewer full time employees in 2019 can claim wages that were paid to employees who were providing services and not providing services. Businesses with over 500 full time employees in 2019 can claim wages paid for not providing services.

Claiming the ERC Under the American Rescue Plan Act

Under the American Rescue Plan Act of 2021, “severely financially distressed employers” may claim the Employee Retention Credit on all wages for the third and fourth quarters of 2021. “Severely financially distressed employers” are those that had gross receipts that were less than 10% of the same quarter in 2019.