If you are a small business owner, you need to know about the Employee Retention Tax Credit (ERC). It is a refundable tax credit that businesses can claim on qualified wages, including certain health insurance costs, that it paid to employees in 2020 and 2021. The ERC was enacted originally by The Coronavirus Aid, Relief, and Economic Security (CARES) Act as an encouragement for small businesses to keep their employees on the payroll and off unemployment compensation. It is a recognition by Congress of how vital small businesses are to our economy.
When it was first enacted, a business that received a Paycheck Protection Program PPP loan was ineligible for the ERC. But Congress has now provided that an eligible employer can claim the ERC on qualified wages that were not counted as payroll costs in obtaining PPP loan forgiveness.
How to Qualify
If a business qualifies for the ERC it can receive up to $26,000 per employee! A business can qualify as an eligible employer for a calendar quarter in 2020 or 2021 if it was carrying on a trade or business and:
(1) its business operations were fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the coronavirus,
(2) its gross receipts for the calendar quarter in 2020 were 50-percent less and for 2021 were 20-percent less than its gross receipts for the corresponding quarter in calendar year 2019, or
(3) for Q3 or Q4 of 2021 it is a recovery startup business which began business after February 15, 2020, and its average annual gross receipts don’t exceed $1 million.
An example of an employer whose business operations were fully or partially suspended due to a governmental order is a restaurant that was forced to close or to reduce its seating capacity due to an order from a State Governor or local Health Department. A business may also have been forced to close a line of business, such as its showroom sales, or it may have had to change the way it trains its employees by switching from in-person meetings to meeting by Zoom. If a business had to fully or partially suspend its operations due to a governmental order it can qualify for the ERC even if it fails to meet the gross receipts test.
Calculating the Amount of the Credit
For Q2, Q3 and Q4 of 2020 the credit is 50% of qualified wages and is limited to $10,000 of wages per employee for the year. To be eligible, employers must have had less than 100 full-time employees in 2019. For Q1, Q2 and Q3 of 2021 Congress decided to be more generous and provided for a credit of 70% of qualified wages which is limited to $10,000 of wages per employee per quarter. The employer must have had less than 500 full-time employees in 2019. This means that an eligible employer can receive for one employee up to $5,000 for the year for 2020 and up to $7,000 for each of the three quarters in 2021, for a total potential credit of $26,000 per employee.
For Q3 and Q4 of 2021 a severely financially distressed employer (whose gross receipts are less than 10% of their gross receipts for the corresponding quarter in 2019) can qualify for the credit even if they had more than 500 full time employees in 2019.
The IRS has prepared a chart with a comparison of the ERC provisions in 2020 vs. 2021 which can be found here: IRS Comparison.
Does My Business Qualify?
If your business saw a sharp decline in gross receipts due to the coronavirus or was forced to suspend its operations due to a COVID-19 related governmental order, the ERC may provide a much-needed infusion of cash to help it recover from the impact of COVID-19. If you would like to know if your business qualifies, or if you have questions about how to determine the amount to which you may be entitled, schedule a consultation online or call our office today. We are here to help.
Robert V. Boeshaar Attorney at Law, LL.M.,PLLC
Latest posts by Robert V. Boeshaar Attorney at Law, LL.M.,PLLC (see all)
- Side Hustle No Longer Profitable? Hobby Loss Considerations - February 15, 2024