Employee Retention Credit. What is it all about? What does it mean for your business? What is ERC? The Employee Retention Credit (ERC) raised a lot of questions from employers last year. ERC was first passed as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. It recently got protracted and amended by the Consolidated Appropriations Act, 2021 (CAA) in December 2020 and once more in March 2021 by the American Rescue Plan Act.

Many employers are curious and confused about how the Employee Retention Credit applies to their businesses, specifically after the new legislation extended the policies. Monily has compiled some most common Employee Retention Credit FAQs for your knowledge and ease. But before we dive into those, let’s thoroughly explore what Employee Retention Credit is.

What is ERC?

The Employee Retention Credit is a refundable credit which an employer can claim back if they qualify. Conditions include eligible wages and certain health insurance costs given to employees.

As per CARES Act – 2020            

Employers who qualify under the CARES Act 2020, including debtors with loans under the initial PPP, can claim ERC under the condition that they have 50% of qualified wages paid which is up to $10,000 each employee per year between March 13 and December 31, 2020.

As per Consolidated Appropriations Act – 2021

Employers who qualify under the Consolidated Appropriations Act 2021, including PPP recipients, can claim their ERC if they have paid 70% of their qualified wages. The minimum amount of qualified wages for ERC is $10,000 for each employee per quarter for the first two quarters of 2021.

As per American Rescue Plan Act – 2021

For the employers who qualify under the American Rescue Plan Act, the credit remains at 70% of the qualified wages up to $10,000 per quarter, making about $7,000 for each employee per quarter of 2021. As per this act, an employee can claim a maximum of $28,000 for the entire year of 2021 or $7,000 per quarter.

Moving on from all the terms and conditions of each plan/act, let’s answer some of those Employee Retention Credit FAQs you have been waiting for.

Which Entities Are Eligible for the Employee Retention Credit?

We believe this is the most common one among all the Employee Retention Credit FAQs we saw. To briefly answer this question, most employers comprising universities, colleges, 501(c) organizations, and hospitals that fall under the enactment of the American Rescue Plan Act are eligible for the credit. After the Consolidated Appropriations Act, businesses with loans under the Paycheck Protection Program (PPP) were also included in eligibility criteria.

Eligibility for employers is based on one of the two aspects— and one of these must be in the calendar quarter the employer wishes to claim the credit for:

1. Any business that was partially or fully suspended or had to slow down as per government order. Note that the credit applies for the duration of that quarter in which the business was suspended, not for the entire quarter. 

If your business is based on IRS guidance, chances are, you do not meet this requirement and would not qualify.

• If you’re an essential business, you must have a disruption in the supply of critical material/goods in a way that affects your ability to continue operations.

2. If you have a significant decline in gross profits.

As per CARES Act – 2020

An employer is eligible if the gross receipts within that calendar quarter are below 50% of the gross receipts than the same calendar quarter of 2019. The employer doesn’t qualify if the gross receipts exceed 80% of the same calendar quarter in 2019.

As per Consolidated Appropriations Act, 2021

As of the beginning of 2021, the act implies that your business must be impacted by quarantines or forced closures resulting in more than a 20% drop in total sales of the quarter compared to the same quarter in 2019.

As for new businesses, IRS considers gross receipts from the quarter in which the business started as a reference for any quarter of 2019 as they do not have figures for that quarter because they were not in business back then.

As per American Rescue Plan Act – 2021

Consolidated Appropriations Act, 2021 further added the option of evaluating eligibility based on gross receipts of the calendar quarter directly preceding the corresponding quarter in 2019.

3. Recovery Startup Business

As per American Rescue Plan Act – 2021

A third category has been added as of the 3rd and 4th quarters of 2021. If you qualify, you may be titled to about $50,000 per quarter.

To meet the requirements of being in the Recovery Startup Business category:

• You must have been carrying on trade after February 15, 2020
• You must have annual gross receipts not exceeding more than $1 million.
• You’re not qualified for the credit under the other two categories, i.e., the decline in gross receipts or partial/full suspension of operations.

Now that we’re clear on employer eligibility let’s move forward with our Employee Retention Credit FAQs.

See Also: Owner’s Equity: What Is It And How Do You Calculate It?

How do I file for the ERC?

To claim your ERC, you need payroll tax filings. However, the process varies if the credits you are claiming are for the current or prior calendar quarters.

If it’s for prior quarters, an employer needs to file an amended payroll tax return (941X) for the quarter they paid qualified wages. Your amended file may either cover initial credit claims or increase the claimed credits based on the latest eligibility analysis.

There’s an exceptional rule for employers who like to retroactively claim credits for 2020 as per the payroll funded by PPP loan when clemency is consequently denied. If you fall under this category, you can file your credits by filing a 941X for Q4 2020, regardless of the quarter of qualified wages of 2020.

For the current quarter, you need to file your ERC claims on a timely filed payroll tax return (941). But, you can also avail credit benefits if you:

• Retain payroll tax deposits
• Request an Advanced Refund of Employee Retention Credit (Form 7200)
• Request a refund on a timely filed payroll tax return (941).

How to calculate full-time employees for ERC? Do owners count?

To calculate the total number of your full-time employees, add up all the employees who worked at least 130 hours per month each month of 2019. Then divide the total sum by 12 to get the average amount.

As for the owners, some fall in the full-time employee calculation, but most don’t. To identify the ones who are eligible as full-time employees and the ones who are not. Just consider this simple rule. Anyone who is a partner in a partnership, a sole proprietor, and is a 2% S corporation shareholder can’t be calculated as a full-time employee.

For quarterly gross receipts, is there any requirement for the calculation? Is it on cash or accrual basis? Is calculation in accordance with GAAP or income tax rules?

Quarterly gross receipts are calculated for the calendar quarter as per the relevant tax basis gross receipts rules. This includes all your receipts from every source, including investments, as reported for income tax purposes using whatever method is used for the tax.

Is someone eligible for ERC if they paid wages as part of the PPP forgiveness application?

Perhaps.

You can’t use the same wages to claim ERC and as the ones to support PPP loan forgiveness. Therefore, payroll costs on a PPP Loan Forgiveness Application, including wages to the lowest payroll costs required to support loan forgiveness, are ineligible for ERC. However, if there are any excess wages after the amount required to support PPP forgiveness, you can include those as ERC-qualified wages.

Do gross receipt calculations include profits of PPP loans during a quarter or amounts forgiven?

This is a rather complicated topic. When we went over the Employee Retention Credit FAQs, many employers seemed to be confused about the relation between PPP loan forgiveness and gross receipts calculations. The constitutional rules do not really provide a clear decree on this, and the IRS hasn’t addressed this directly either. Hence, going by the general tax rules, loan forgiveness, even if tax-exempt, is included in gross receipts. Following certain circumstances, this can possibly make you ineligible for ERC of a specific quarter. To be sure, our recommendation is to carefully consider the timing of loan forgiveness recognition and wait for additional guidance from the IRS before you claim for ERC.

Are “stay-at-home” orders qualified as restrictions on business operations?

Generally, if you can operate in any way that keeps your business going, the business is not eligible to be in the “suspended” category. As long as your operations continue via telework or portability to be shifted to work-from-home, your business is not affected by stay-at-home orders. If your customers can’t reach out to you because of stay-at-home orders, this doesn’t mean the law suspended your business. Many businesses shifted to alternate options like telework or work-from-home. The stay-at-home order is a bit different than business shutdown or restriction orders. The law is not directly shutting you down or stopping you from keeping your operations running, so in this case, stay-at-home orders are not qualified as restriction orders.

What costs are counted as wages for the ERC?

All paid costs which are subject to FICA are included in wages. This also includes qualified health plan costs. Some wages need to be excluded, such as severance for all employers and vacation pay for large employers.

Does “wages paid while providing services” relate only to shutdowns or also to employees who were on paid sick leaves while quarantining? What about the termination pays for employees being laid off?

If you are an ERC eligible employer due to work lockdown or decline in gross receipt, this rule applies to you. This also involves coordination with other payroll-based programs like the Families First Coronavirus Response Act (FFCRA).

Private employers with fewer employees than 500 and all government employers were obligated to offer their employees paid sick and/or family leaves for various COVID-19-related reasons. This was effective as of April 1, 2020, till December 31, 2020. Paid leaves determined by the FFCRA in 2020 or the requirements for extended FFCRA credits in 2021 are not eligible for ERC.

Employers can include paid leaves that are excluded from FFCRA programs during the employer’s eligibility period, whether the employee is ill or quarantined. However, this does not include paid leaves previously accrued under an existing benefit plan. The dismissal of former employees is also not eligible for the ERC.

If my business operates both nationally and internationally and the branch outside United States got shut down by government order of another country, would it still be eligible for the ERC as per US Payroll based Shutdown criteria?

As per notice 2021-20, decrees or ordinances of the federal government of any state or local government may be considered. Considering this, foreign governments are not included, but tribal governments or US territories are.

How do the employee aggregation rules apply to companies operating outside the United States? Is there any different treatment if the company is structured so that non-US components are separate entities, the parent or subsidiary companies?

Foreign entities and placements are included as members of the audited entity. However, when counting the number of full-time employees in 2019, you can exclude foreign employees.

Final Notes

There are still a lot of questions out there about Employee Retention Credit. With new amendments and laws, employers are trying their best to keep up. We advise you to keep following Monily to catch up on any new policies related to ERC and much more, which will help strengthen your business. Hope you found your answers in our comprehensive guide covering most of the Employee Retention Credit FAQs.

If there’s anything else you would like to ask us, feel free to leave a review below, and we will try to cover everything.

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