Navigating the Untapped Resource of the Employee Retention Credit
The Employee Retention Credit may seem complicated. It may seem like small potatoes compared with the EIDL and PPP opportunities of recent days. You may have even heard that the ERC has been ‘cancelled’ or ‘ended early’ as a result of the Infrastructure Investment and Jobs Act (IIJA) recently signed into law. Or maybe you’ve heard that you can’t claim it if you’ve gotten other kinds of money.
The fact is that the Employee Retention Credit (ERC) is still worthwhile and is definitely something that qualified businesses should not miss out on. Here are some facts, as well as a few myths in need of dispelling.
MYTH 1: If you took a PPP loan, you cannot qualify for the ERC.
FACT: This actually used to be true! The ERC was largely ignored because it could initially not be used if you had a Paycheck Protection Program (PPP) loan. So most of us simply moved onto the next bit of information we needed to digest quickly. We forgot about it. But in actuality, that restriction was lifted by the Consolidated Appropriations Act of 2021. This means that with or without a PPP loan, your company can take advantage of the ERC if you meet the other qualifications.
So who actually qualifies for the ERC?
Option #1: Qualification through Shut-Down. Any business that was subject to a partial or full shut down in 2020 or 2021 due to the Covid-19 epidemic.
What does ‘partial shutdown’ mean exactly?
Partial shutdown is defined as a part of the business being shut down that is equal to or greater than 10% of the overall business gross receipts in the same quarter in 2019. So if your dining room used to be 50% of your gross sales, and your dining room was shut down for two months, you’d qualify. However, if only 5% of your sales were eat in, and your dining room was closed for those same two months, you might not qualify.
Option #2: Decline in Gross Sales. Any business that experienced a 20% or greater reduction in revenue as compared with the same quarter in 2019 is eligible for the ERC. So, if the dining room mentioned above still had only 5% of their sales as eat in, but their take out business dropped by 25% in quarters one and two of 2021 as compared to 2019? Well, they would qualify.
By the way, if you started a business in 2020 or 2021, your lack of 2019 sales doesn’t mean you are out of luck. You should instead look into your eligibility for the Recovery Startup Business ERC. I don’t cover the details of it here, but the program is very similar. If you are interested in this watch our blog for a follow-up article.
MYTH 2: The ERC was cancelled as soon as the infrastructure bill was signed. You missed it!
FACT: The ERC originally allowed consideration of any time period between April 1 2020 to December 31, 2021. That’s basically Q2 2020 all the way through the end of this year. With the recent signing of the infrastructure bill, the only thing that’s changed is that the credit can now only consider time periods through September 30th, 2021.
So we’ve basically changed from a 21-month time frame to an 18-month time frame of consideration. That’s still a lot of time and a considerable opportunity for financial help!
How much is the credit worth?
The ERC is fairly easy to calculate once you get all the disqualified wages and other exceptions out of the way. Here are some big things to consider.
If you own more than 50% of multiple businesses then all qualification tests must be done at the group level.
When considering employee wages for credit calculations no owners, or owner family members, will qualify. Their wages cannot be a part of the credit calculation.
Wages used for PPP funds cannot also be used for the ERC. This means to get the most out of each program, you will need to allocate wages between the two programs.
The calculation of the credit differs depending on the year.
For 2020 wages paid, credit of 50% of the first $10,000 of wages paid to each qualifying employee during the entire qualified time period. This essentially amounts to a maximum of $5,000 per employee for the YEAR.
For 2021 wages paid, there is a credit of 70% of the first $10,000 of wages paid to each qualifying employee for each qualifying period. This essentially amounts to a maximum of $7,000 per employee per QUARTER. Yes, per QUARTER.
As a reminder, given the recent bill signing, the qualifying period for 2021 is only Q1 to Q3, instead of the entire year. So the maximum available per employee would be $21,000 for 2021. The short story is there is a lot of potential assistance contained in this credit!
How to apply.
Actually, the ERC is taken right on your quarterly payroll tax form 941. Of course, since the qualifying time periods have passed, it’s 99% likely that these forms have already been filed for the qualifying time periods. If you are utilizing an outsourced payroll company, these are most often filed automatically at the end of every quarter.
But, the good news is that these forms can still be amended to take advantage of this credit! This said, we highly recommend working closely with your payroll company or an accountant if you want to claim this credit, especially if you have already claimed forgiveness on a PPP loan utilizing wages from these qualifying periods.
So, yes it seems complicated. And, yes it might take a bit of help. But as you can see, the Employee Retention credit can be very beneficial for those who qualify. And if you should find that your accountant or payroll company is not handling the ERC, please reach out. We will be more than happy to connect you with someone who is.