We need all the help we can get these days, which is why the government has extended the Employee Retention Credit or ERC program that helps business owners like you to keep your team members on your payroll.
Very simply, ERC makes it possible for your workers to still get paid, even if Covid-19 has kept them from working during the period covered by the program.
Now that the Consolidated Appropriations Act (CAA) has been signed into law, more businesses and their employees will be able to benefit from the ERC as we move further into first half of the year.
In this post, we’ll talk about how the ERC program works, who can benefit from it, who won’t be able to benefit from it, and why some business owners might hit a speed bump or two in claiming their credits. Then we’ll talk about how you’ll be able to benefit from the ERC if your business should be eligible.
How ERC Works
In a nutshell, the ERC program gives employers a refund on their payroll taxes. You’ll be able to claim credit of up to 70% of each of your full-time employees’ qualified wages between March 13 and December 31, 2020, as well as for the first and second quarter of 2021.
That means you can get up to $10,000 per employee, per quarter for this year’s first two quarters (versus the $10,000 per year that was available before the CAA was signed).
When we say “qualified wages”, we mean the wages and compensation that you pay to some or all of your full-time employees in the quarters covered by the program. “Full-time employee”, on the other hand, would be one who puts in a weekly minimum of 30 hours total, or a monthly minimum total of 130 working hours.
Expenses covered by group health plans count under the ERC, even if this is the only form of compensation you give a particular team member.
Credits are claimable during the first and second quarters this year, or from January 1 to June 30, 2021. Note that credit only applies to that part of a quarter that your business was closed down, and not for the entire quarter.
Also note that only salaries that your team member would have received during 30 days right before your business’ revenue started to dip, count under the ERC.
Now, if you have 500 or fewer full time full-time employees, you can claim ERC on ALL qualified wages paid out during the covered periods whether or not your employees were working at the time.
But for businesses with an employee headcount of over 500, only the wages paid to employees who haven’t been working during the first or second quarter will be considered for the ERC.
So what happens is, the ERC is applied to your share of the Social Security taxes of your employee, which means you’ll be able to refund that share, in full.
This means that you’ll be getting the overpayment back as a refund which was taken out of the total tax amount. Put another way, if your credit exceeds your total liability of your share of an employee’s Social Security in the covered quarter, you’ll be able to refund the excess.
Don’t forget: You can claim ERC from 2020 and 2021.
Who Can Benefit From ERC
If your business has taken a hit from Covid-19 and you’re still in business between January 1 and June 30 of this year, ERC just may be able to help you out. We say “may” because you’ll have to meet the criteria given in the CAA.
Basically, you’re eligible for the ERC if your business was fully or partially closed because of a COVID-19-related government order, or there’s been a significant decline in gross receipts—but most businesses become eligible for the latter criterion.
How significant is “significant”? Starting in 2021, your gross receipts must’ve gone down by more than 20% in the first and second quarters compared to the same period in 2019.
If you weren’t in business that far back yet, you can use the gross receipts from the quarter you opened for business as a point of reference for any quarter you don’t have 2019 figures for.
Now if you were able to take out a loan under the Paycheck Protection Program or PPP, you can also qualify for ERC tax credit, but only for wages that haven’t been forgiven or expect to be forgiven under PPP.
And also starting this year, organizations that hadn’t had access to ERC will be able to benefit as well. These organizations include federal credit unions and similar instrumentalities, public universities or colleges, and medical or hospital care providers.
Who Cannot Benefit From ERC
The IRS says you can’t benefit from the ERC if your business is considered essential, unless your supply of critical material or goods was disrupted to an extent that hinders your operations.
You also can’t benefit from the ERC if your business premises are closed, but you’re pretty much business as usual through online means.
Take note that you may not be able to benefit from ERC if you’ve already received other credits or government relief provisions. Take the Families First Coronavirus Response Act, for example—any salaries you’ve gotten employer tax credit for, from this Act won’t be considered by the ERC.
If salaries on your payroll benefited from sections 45S or 51 of the Internal Revenue Code, whether they were paid medical or family leaves or tax credits for work opportunities, they also won’t count under the ERC.
How You Can Benefit
So say you have figured out that you are eligible to benefit from the ERC—what you do is you calculate your total qualified wages and the related health insurance costs for each quarter.
You’ll be needing Forms 941 and 7200, the latter applying to small businesses in 2019 with 500 workers or less to help them ask for credit in advance.
But while the ERC can be a boon for business owners looking for ways to keep their employees on the payroll during the pandemic, it can also be a bane. For one thing, nobody wants to have to figure out their ERC eligibility when they’re figuring out their year-end taxes at the same time.
Other business owners who would very much like to benefit from the ERC might have already benefited from the PPP, and have loan forgiveness applications in the pipeline.
While it is actually possible to take advantage of both the ERC and PPP, the deep dive into the nitty-gritties of their business’ financials to find out might be beyond these business owners’ accounting capabilities.
There’s bound to be some overlap between the two programs, and business owners looking to make the most of the assistance government has to offer are like to find ways to leverage both. If you could use some assistance in finding these ways or in determining your business’ ERC eligibility, we’re just a Calendly booking away.