The Employee Retention Tax Credit (ERC) is a refundable payroll tax credit created to provide relief to business owners affected by the pandemic and help keep their employees on payroll. Generally, eligible businesses can claim the credit for tax years 2020 and 2021.
- ERC credit can be claimed retroactively for 2020 and 2021 credits
- ERC credit for the 2020 tax year is up to $5,000 per employee
- ERC credit for the 2021 tax year is up to $21,000 per employee
Who is eligible for the ERC?
Employers of businesses or tax-exempt organizations can qualify for the tax credit if it is a Recovery Start-up Business or one of the following events that occurred in the period for which the credit is claimed:
- Operations of trade or business were either fully or partially suspended by orders from the federal, state, or local government.
- The business experienced a significant decline in gross receipts.
- It is a Recovery Start-up Business
Recovery Start-up Businesses
Recovery Start-up Business (RSB) are eligible to apply for an ERC for the 3rd and 4th quarters of 2021. In order for a business to qualify as an RSB, it must meet the following criteria:
- It’s a trade or business that began operation after February 15, 2020.
- Its average annual gross receipts are less than 1,000,000.
- It does not meet the other eligibility criteria, such as full or partial suspension of operations or a decline in gross receipts (this criterion is not required for the 4th quarter)
Recently the Infrastructure Investment and Jobs Act limited the availability of 2021 4th quarter ERC credits to RSBs. In addition, the tax credit for employers of Recovery Start-up Business credit is limited to $50,000 for any calendar quarter.
How is the Employee Retention Credit calculated?
The 2020 and 2021 ERC credit is calculated differently:
2020 ERC. For the 2020 tax year, the ERC was limited to 50% of the first $10,000 of qualified wages paid to the employee from March 13, 2020, to December 31, 2020. This means that the maximum amount that could be credited back to the employer was $5,000 per employee.
2021 ERC. For the 2021 tax year, the ERC is equal to 70% of up to $10,000 in qualified wages paid to an employee, per quarter from January 1, 2021, to September 30, 2021. The maximum credit that can be claimed for each employee per quarter is $7,000. An employer could receive up to $21,000 credit for each employee in 2021.
Example: Calculation of 2021 ERC Q1 and Q2
|Employee||Wages Q1||Wages Q2||Total Wages||Credit|
What are qualified wages?
Qualified wages include all wages and qualified health plan expenses paid to full-time employees. A full-time employee is an employee who worked an average of at least 30 hours per week or 130 hours or hours per month. Smaller businesses were allowed to include wages paid to employees who were working and also to employees not providing services. Larger businesses could only include wages paid to employees that were not working.
- Employers with 100 or fewer full-time equivalent employees during 2019 can apply ERC to all qualified wages paid to employees during relevant quarters providing services and to those not providing services.
- Employers with more than 100 full-time equivalent employees during 2019 can apply ERC to all qualified wages paid to employees who were not working during relevant quarters.
- Employers with 500 or fewer full-time equivalent employees during 2019 can apply ERC to all qualified wages paid to employees during relevant quarters providing services and to those not providing services.
- Employers with more than 500 full-time equivalent employees during 2019 can apply ERC to all qualified wages paid to employees who were not working during relevant quarters.
How do you calculate a significant decline in gross receipts?
A significant decline in gross receipts is calculated differently for 2020 credits and 2021 credits.
2020 ERC. For the 2020 tax year, a significant decline in gross receipts is calculated by determining the first calendar quarter in 2020, where the gross receipts are less than 50% of the gross receipts for the same calendar quarter in 2019.
|Quarter||2020 Gross Receipts||2019 Gross Receipts||% of 2019 Gross Receipts||Eligible|
2021 ERC. For the 2021 tax year, a significant decline in gross receipts is calculated by determining the first calendar quarter in 2021, where the gross receipts are less than 80% of the gross receipts for the same calendar quarter in 2019. If the business doesn’t have gross receipts from 2019, then they can use the same calendar quarter in 2020. Alternatively, employers may elect to compare the immediately preceding calendar quarter to calculate the decline in gross receipts.
|Quarter||2021 Gross Receipts||2019 Gross Receipts||% of 2019 Gross Receipts||Eligible|
Claiming the Credit
Even though the ERC program expired on September 30, 2021, employers can claim the credit retroactively for wages paid between March 12, 2020 and October 1, 2021 (Jul. 1-Dec.31, 2021 for RSBs). Employers must file an amended employment tax return for the quarters it was eligible to apply for ERC. The filing deadline is April 15, 2024, for 2020 credits and April 15, 2025, for 2021 credits.
Employers who received the Payroll Protection Program (PPP) loan can also apply for ERC credits for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.
How we can help
Contact us if you have any questions regarding these credits, need help evaluating if your business is eligible, or need assistance calculating or claiming the credit. Our specialists can help you get the maximum credits possible.