How to Claim the Employee Retention Credit
The following article was first published in the Insights section of Whittlesey’s website. It is reposted here with permission.
As many as 60% of businesses closed during the pandemic. While the pandemic may finally be nearing its end, there’s a good chance your business suffered from it.
Government mandates may have forced you to limit or cease operations entirely.
Fortunately, you may have help from the IRS, and that help comes in the form of the Employee Retention Credit.
The ERC is a COVID-related government subsidy your business may still be able to take advantage of. It could provide needed tax help as you balance the books for the coming years.
What Is the ERC?
The ERC is a refundable payroll tax credit that the U.S. government instituted to help businesses retain employees during the pandemic.
“Refundable” means that the IRS will pay you back more in a refund than you paid in payroll taxes.
The ERC exists to help businesses and nonprofit organizations that experienced one of the following:
- A full or partial suspension of business operations, specifically as a result of a federal, state, or local government order during the COVID-19 pandemic, or
- Suffered a “significant” decline in their gross receipts during the pandemic
You calculate your ERC credit based on “qualified wages,” which includes employee benefit plans such as healthcare.
The government issues this credit based on a percentage of these qualified wages.
Do You Qualify?
To qualify for the ERC, you must have a business that suffered the above.
This could be either a partial or full suspension of normal operations—but only if a government mandate forced you to do so.
If not, you should have seen a decline in your business’s gross receipts, specifically during the pandemic.
However, there are rules concerning eligibility that vary depending on the calendar year. Your credit will vary depending on whether you’re trying to claim for payroll quarters in 2020, 2021, or both.
Do Non-Profits Qualify?
Yes. While a nonprofit is generally tax-exempt, it does qualify as a type of trade or business for purposes of the ERC credit.
What About Businesses That Received PPP Loans?
When the pandemic first hit, the COVID stimulus laws said that taking a Paycheck Protection Program loan would preclude you from obtaining the ERC.
However, this was modified with subsequent law changes. A business or nonprofit that received a PPP loan can still apply for the ERC.
Thanks to the Taxpayer Certainty and Disaster Tax Relief Act of 2020, you can avail yourself of the ERC even if you accepted a PPP loan.
This includes if you accepted multiple PPP loans over the course of the pandemic.
However, you can’t double dip.
You can’t claim the ERC for qualified wages that you also used to obtain loan forgiveness with the PPP. If you had your PPP loans forgiven, analyzing the wages used for forgiveness of that PPP loan is important to see what may be available for the ERC.
How Does the 2020 ERC Credit Work?
As stated above, you must have experienced either full or partial suspension of your business operations.
Again, this must be a result of a COVID-related government mandate that forced your hand. Barring that, you will have needed to experience a dip in gross receipts.
How much of a dip, exactly? It should be more than 50% of each quarter’s 2020 gross receipts compared to the same quarter in 2019.
There is a maximum for how much wages you can claim per employee, year, or quarter.
That limit is $10,000. This means that, at most, you can claim $5,000 per employee for all of 2020—50% of $10,000 of wages for 2020.
You should also consider whether you’re a large employer or a small employer.
For the 2020 year calculation, a large employer has an average of more than 100 employees during the 2019 year. A small employer would have less than 100 on average—for the 2020 calculation.
For 2021, the large employer threshold is 500 or more employees.
In the case of a large employer, qualified wages are those you paid employees not to work. This, again, will relate to either the suspension of business operations—or as a result of a decline in your gross receipts.
The only distinction between a large and small employer is that the small employer can claim wages whether or not employees were working.
How Does the 2021 ERC Credit Work?
The same $10,000 limit applies to 2021, except this time, an employer can claim up to 70% of the same qualified wages as before.
That means that there’s a maximum of $7,000 per employee available to your business or nonprofit.
To qualify, these should be wages between Jan. 1, 2021, through Sept. 30, 2021. That means for 2021, you could claim a total of $21,000 for a single employee for those three eligible quarters.
Another difference between claiming in 2021 and 2020 is that the gross receipts decline should be greater than 20%.
However, the option to use an alternative quarter as it concerns determining eligibility does exist.
Does the ERC Affect Your Federal and State Income Taxes?
Unfortunately, yes. The ERC is effectively treated as taxable income because you must reduce the wage expense tax deduction for the amount of the ERC received.
Is It Too Late to Claim the ERC?
No. You can still claim the ERC through a retroactive filing of IRS Form 941-X. This is called the Adjusted Employer’s Quarterly Federal Tax Return, also known as the Claim for Refund.
However, you generally have up to three years from the date you filed your Form 941 to claim it.
Therefore, you should carefully consider the coming statute of limitations so you do not miss out on these refunds.
About the author: Brenden Healey is a tax partner in Whittlesey’s Hartford office. He consults with businesses and individuals and focuses his practice on manufacturing and distribution, retail industries, real estate, and nonprofit organizations.
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