A part of the original CARES Act that came about during the COVID-19 pandemic, the Employee Retention Credit (ERC) is a payroll tax credit that allows businesses to receive a refundable payroll tax credit for keeping their employees on payroll. Originally, employers could not take this credit if they also received a Paycheck Protection Program (PPP) loan from the SBA. However, the passage of the Consolidated Appropriations Act (CAA) at the end of 2020 changed this rule.
“A lot of businesses are under the impression that they don’t qualify (for the ERC) when they actually do,” said Scott Black, accounting manager with Barrett & Company. “Some of them aren’t taking a hard enough look at their revenue per quarter.”
For 2020 or 2021, there are two very different ways that a business can qualify for the ERC. For 2020, in order to qualify, the business needs to have met one of two scenarios:
- The business (with less than 100 full-time employees) was shut down or partially shut down by government order. According to the IRS, if more than a nominal portion of the business was required by local, state or federal order to shut down operations, then it qualifies under this scenario.
- Business (with less than 100 full-time employees) has a 50% reduction in revenue in any one quarter for 2020 when compared to the same quarter in 2019.
In both of these scenarios for 2020, any wages used for the PPP loan forgiveness would need to excluded. This creates the challenge of separating out which wages qualify and which do not.
For 2021, there is only one way to qualify for the ERC. The business (with less than 500 full-time employees) must have a revenue reduction of 20% in a quarter when compared to the same corresponding quarter of 2019. However, same as the scenarios for 2020, if a PPP round two was taken, any wages towards PPP forgiveness must be excluded.
Drew Barrett, CPA and managing partner at Barrett & Company, said the ERC for 2020 is equal to 50% of qualified wages (limited to $10,000 per employee in total) paid to employees from March 13, 2020, to Dec. 31, 2020, for a maximum credit of $5,000 per employee. For 2021, the credit is increased to 70% of qualified wages (limited to $10,000 per employee, per quarter) paid to employees between Jan. 1, 2021, and Sept. 30, 2021, for a maximum credit of $7,000 per employee, per quarter, or $21,000 per employee in total.
“In real dollars, the ERC dollars we’ve uncovered for our clients, we’re talking tens of millions of dollars,” Barrett said. “The largest client I’ve done was $1.3 million in ERC dollars. We want to help our clients know if they qualify or not.”
Barrett said that many business owners want to know how they get the credit and when the deadline is for it. He said businesses can amend their quarterly tax returns and the timeframe for that is three years after the date that the quarterly return was filed.
“If you look at the shutdown period, we’re still a year away from being outside of that time period,” Barrett said. “So, if you have a company that doesn’t know about it now, but does qualify for that for that specific period, they’re not required to file that amended tax return until a year from now.”
“It’s essentially just sitting there on the table (ERC money),” Black said. “The PPP had a specific window, there were so many dollars on the table and once they were gone, they were gone, but this is just sitting there.”
Business owners who are curious if their business qualifies for the ERC should reach out to their local CPA professionals.