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When I think back to the beginning of the pandemic in March 2020, I’m reminded of the frenetic pace at which everyone was trying to figure out the various relief options of the federal CARES Act. Very quickly, the Paycheck Protection Program emerged as the superstar of the stimulus package. For the next several months, my colleagues and I were inundated with questions about the PPP.
And although, at the time, I was somewhat familiar with the Employee Retention Credit, a tax credit that came out of the CARES Act, it was not until January 2021 when the ERC slowly began to gain more attention. Congress passed the Consolidated Appropriations Act of 2021 at the end of December 2020, and it dramatically changed ERC rules.
Prior to the passage of the CAA, a business had to choose between participating in the PPP or claiming the ERC. But under the CAA, Congress removed the “either-or” limitation. Now, businesses that had already taken a PPP loan could go back and also claim the ERC for 2020, provided they were not claiming PPP and ERC funds to cover the same payroll costs. On top of that, there were additional changes to the rules for the ERC: The credit would extend into 2021 rather than expire at the end of 2020; it would be easier for businesses to be eligible for the 2021 credit; and the credit would be larger in 2021.
The ERC is now becoming the new superstar of the CARES Act.
Can I Claim the ERC? There are many complexities when it comes to the details of the ERC. You should consult with your CPA or payroll provider if you are thinking about claiming the credit. Here’s basic information to get you started, but it’s not everything you should consider.
Qualifying for the ERC Your business has to pass one of two tests to claim the ERC.
Receipts test: Your business needs to have experienced a certain level of decline in revenues. For 2020, that would be a 50% decline when comparing each quarter to the same quarter in 2019. For 2021, that would be a 20% decline when comparing each quarter to the same quarter in 2019.
Orders test: Your business needs to have experienced more than a nominal impact in operations caused by a federal, state, local, or regulatory order. Full or partial shutdown, limited capacity, or shutdowns of your supply chain vendors could qualify you.
Calculating the ERC To calculate the amount of the credit, you’ll need to look at the size of your company, then calculate the amount of the credit separately for 2020 and 2021, as there are different rules in place for each year.
For the 2020 credit, for employers who averaged fewer than 100 full-time equivalents during 2019, the credit is available for all employees. For employers who averaged more than 100 FTEs during 2019, the credit is only available for those employees who were paid but were not working due the company’s decline in revenues and/or impact in operations.
For the 2021 credit, for employers who averaged fewer than 500 FTEs during 2019, the credit is available for all employees. For employers who averaged more than 500 FTEs during 2019, the credit is only available for those employees who were paid but were not working due to the company’s decline in revenues and/or impact in operations.
Amount of the credit:
The 2020 credit is equal to 50% of the first $10,000 of wages paid to each employee for whom the credit is available. Max credit is $5,000 per employee.
The 2020 credit is available for wages paid from March 12, 2020, through Dec. 31, 2020.
The 2021 credit is equal to 70% of the first $10,000 of wages paid to each employee for whom the credit is available, for each quarter of 2021. Max credit is $28,000 per employee.
The 2021 credit is available for wages paid from Jan. 1, 2021, through Dec. 31, 2021.
Keep Your Eyes Open Just as we saw with the PPP, it can feel like a roller-coaster ride keeping up with all of the legislation and changing rules. At the time of this writing, one of the proposed versions of the infrastructure bill includes a significant change to the ERC: termination of the credit at Sept. 30, 2021, instead of Dec. 31, 2021.