What is the Employee Retention Credit?
The Employee Retention Credit (ERC) or sometimes referred to as Employee Retention Tax Credit (ERTC) was designed as an incentive to encourage businesses to retain employees on their payroll throughout the COVID-19 pandemic. Businesses impacted by government orders or have experienced a decline in revenue may be entitled to significant tax credit recovery.
The ERC was included in the CARES Act passed in March 2020 and subsequently has been adjusted by legislation since then, including the Infrastructure Investment and Jobs Act passed in November 2021. Many businesses are potentially eligible for ERTC. If your business is qualified for ERC, you could receive cash back from previously paid amounts.
CARES ACT
All wages paid between March 13, 2020, and December 31, 2020
Payroll tax credit rate - 50 percent of Qualified
Limit on per-employee creditable wages $10,000 for the year
Eligibility for the credit - reduction of gross receipts by at least 50 percent of the comparable quarter in 2019
100-employee delineation for determining the relevant qualified wage base (i.e. all wages paid to employees are available for the credit up to the cap)
Ineligible for ERC if you take a Paycheck Protection Program loan
Wage qualification is based on the average number of employees the business employed in 2019
COVID 19-RELIEF PACKAGE
Beginning on January 1, 2021, and through December 31, 2021
Payroll tax credit rate - 70 percent of Qualified wages
Limit on per-employee creditable wages $10,000 for each quarter
Eligibility for the credit - threshold drops to 20 percent. Safe harbor allows employers to use prior quarter gross receipts to determine eligibility
500-employee delineation for determining the relevant qualified wage base
Employers who receive PPP loans may still, qualify for the ERC with respect to wages that are not paid for with forgiven PPP proceeds retroactive to the CARES Act
Allows new employers who were not in existence for all or part of 2019 to be able to claim the credit. This new provision is retroactive to the effective date included in Section 2301 of the CARES Act
There Are 2 Ways That a Business Can Qualify for ERC
Full or partial suspension of business operations as a result of government order.
A significant decline in revenue compared to the same quarter in 2019. A decline in revenue is defined as equal or greater than 50% for 2020 and equal or greater than 20% for 2021.
The 5 Biggest ERC Myths That Are Costing Businesses Significant Money
1
My business does not qualify for ERC because it did not experience a significant decrease in revenue. THAT IS A MYTH!
Qualification comes down to meeting one of two tests. Either the business was impacted by a full or partial shutdown OR the business experienced a significant decline in revenue.
2
Businesses do not qualify if they received PPP loans. THAT IS A MYTH!
While there are certain guidelines that must be addressed if a business received a PPP Loan, it does not automatically disqualify the business from ERTC eligibility.
3
Only small businesses qualify for ERTC Recovery. THAT IS A MYTH!
There are many items to be considered for any business to qualify for ERTC recovery. Remember, a business has to meet the business interruption or significant revenue decline test first. Once it meets that test, then the number of employees will determine the amount of qualified wages that can be considered for calculating the credit.
4
My business has grown during quarantine or does not qualify due to being a nonprofit/charity. THAT IS A MYTH!
Nonprofits who paid W-2 wages are potentially eligible for the ERTC tax credit. Just because a business grew during 2020-2021 does not automatically exclude them from potential ERTC eligibility.
5
My business has grown during quarantine or does not qualify due to being a nonprofit/charity. THAT IS A MYTH!
Many businesses were deemed essential, however, if the business had to close access to job sites or had to close their physical locations, that business may still qualify for the ERTC.