Employee Retention Credits (ERC)

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What is the Employee Retention Credit?

The CARES Act of 2020 created the Employee Retention Credit (ERC) at the same time it enacted the Paycheck Protection Program. This lesser-known incentive has proven to be a significant opportunity for businesses of all sizes. The ERC allows businesses to recover costs associated with keeping employees on payroll during hardships related to COVID-19.

ERC Credit Amount

The ERC allows qualified employers to recover wages and health plan expenses incurred during COVID-19.

• For 2020 periods, businesses can recover 50% of qualified costs, up to $5,000 per employee
• For 2021 periods, businesses can recover 70% of qualified costs, up to $7,000 per employee, per quarter

Employers are eligible to claim up to:

$26,000 per employee

Key Insights

• Businesses who took PPP can also claim the ERC for both 2020 and 2021
• A partial suspension can be related to specific departments, service offerings, programs, etc.
• Additional rules apply for businesses with over 100 (2020) or 500 (2021) full-time employees
• Some affiliated organizations are required to aggregate for gross receipt and full-time employee
determinations
• Tax-exempt organizations can be eligible for the ERC

Federal Employee Retention Credit (ERC) – Full or Partial Suspension

Under IRS notice N-2021-20, An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows all of the employer’s operations to remain open. However, an employer that operates an essential business may be considered to have a partial suspension of operations if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order. For example, an employer that maintains both essential and non-essential business operations, each of which are more than nominal portions of the business operations, may be considered to have a partial suspension of its operations if a governmental order restricts the operations of the non-essential portion of the business, even if the essential portion of the business is unaffected. In addition, an essential business that is permitted to continue its operations may, nonetheless, be considered to have a partial suspension of its operations if a governmental order requires the business to close for a period of time during normal working hours.

Solely for purposes of this employee retention credit, a portion of an employer’s business operations will be deemed to constitute more than a nominal portion of its business operations if either (i) the gross receipts from that portion of the business operations is not less than 10 percent of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019), or (ii) the hours of service performed by employees in that portion of the business is not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019).

An employer may be considered to have a full or partial suspension of operations due to a governmental order if, under the facts and circumstances, the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations. If the facts and circumstances indicate that the business’s operations are fully or partially suspended as a result of the inability to obtain critical goods or materials from its suppliers because they were required to suspend operations, then the business would be considered an eligible employer for calendar quarters during which its operations are fully or partially suspended and may be eligible to receive the employee retention credit.

If you have any questions, please reach out to Jeremiah Becker at jbecker@veritytaxcredits.com or by phone at 470.257.8436

Federal Employee Retention Credit (ERC) – Gross Receipts

Under the section 448(c) regulations, “gross receipts” means gross receipts of the taxable year and generally includes total sales (net of returns and allowances) and all amounts received for services. In addition, gross receipts include any income from investments, and from incidental or outside sources. For example, gross receipts include interest (including original issue discount and tax-exempt interest within the meaning of section 103 of the Code), dividends, rents, royalties, and annuities, regardless of whether such amounts are derived in the ordinary course of the taxpayer’s trade or business. Gross receipts are generally not reduced by cost of goods sold, but are generally reduced by the taxpayer’s adjusted basis in capital assets sold. Gross receipts do not include the repayment of a loan, or amounts received with respect to sales tax if the tax is legally imposed on the purchaser of the good or service, and the taxpayer merely collects and remits the sales tax to the taxing authority.

If you have any questions, please reach out to Jeremiah Becker at jbecker@veritytaxcredits.com or by phone at 470.257.8436

Two ways your business can qualify for the Employee Retention Credit

1. Significant Decline in Gross Receipts

The employer’s gross receipts for a 2020 calendar quarter were below 50% of the comparable quarter in 2019, or for a 2021 calendar quarter were below 80% of the comparable quarter in 2019. Once the employer’s gross receipts rise above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

More About Gross Receipts

2. Full or Partial Suspension by Government Order

The employer’s business has been fully or partially suspended by government order due to COVID-19 during the calendar quarter

More About Full or Partial Suspension

How do you claim the ERC?

The Employee Retention Credit allows multiple ways for businesses to quickly receive the benefit. Here are three methods used to claim the benefit:

METHOD 1: Advance Credit Request (Form 7200)

Small businesses are permitted to request an advance credit based on wages paid in 2019 and anticipated wages for the current calendar quarter.

METHOD 2: Immediately Reduce Federal Deposits (Form 941)

Qualified businesses that anticipate an ERC in the current calendar quarter can immediately monetize the credit benefit by reducing federal payroll tax deposits (EFTPS) up to the amount of the anticipated credit. When the quarter closes, Form 941 will be used to reconcile credits and tax liabilities.

METHOD 3: Amend Withholding Tax Returns (Form 941-X)

The most common way that businesses have received the ERC benefit is by amending a previously filed Form 941 using Form 941-X Taxpayers typically have a three-year statute of limitations to file a Form 941-X. Once the withholding return has been amended, the IRS will process the credit and apply it as an overpayment on the account. Taxpayers can elect to utilize the credit against future withholding returns or request a refund check for the overpayment

Penalties Waived

Understanding that the Employee Retention Credit was a new program with rules and regulations were slow to come out, Congress waived penalties associated with reducing federal tax deposits for the purpose of claiming the ERC.