Did you know that you can receive thousands of dollars per employee through the Employee Retention Credit (ERC)? Unfortunately, while most businesses applied for PPP and EIDL loans in 2020 and 2021, few bothered to explore the Employee Retention Credit because it was initially unavailable to PPP loan recipients.

However, the Taxpayer Relief Act updated the ERC to allow PPP loan recipients who meet the eligibility requirements to claim the ERC. This update and several other retroactive updates have expanded the ERC eligibility requirements and made it available to more businesses.

What is the Employee Retention Credit?

The Employee Retention Credit is a refundable payroll tax credit that was introduced as part of the CARES Act in March of 2020. Following its initial enactment, the ERC was updated by the Relief Act, the American Rescue Plan and the Infrastructure and Jobs Act. Although the ERC has been terminated for most businesses as of Sept. 30, 2021 and for all businesses as of Dec. 31, 2021, it can still be claimed retroactively for up to three years following the filing of the 941 tax form for the respective quarter.

The ERC is claimed quarterly and reduces payroll taxes owed, distributing any excess amount as a cash refund. The ERC is available for the following periods in 2020 and 2021:

• 2020: March 13 through December 31
• 2021 Q1: January 1 through March 31
• 2021 Q2: April 1 through June 30
• 2021 Q3: July 1 through September 30
• 2021 Q4: October 1 through December 31 (Recovery Startup Businesses only)

Do I qualify?

The ERC appears fairly straightforward on the surface, but the devil is in the details. To be eligible for the ERC, you must have either suspended operations due to government mandates during COVID-19 or experienced a decline in quarterly gross receipts in 2020 or 2021 when compared to the same periods in 2019. There are a lot of misconceptions surrounding these two requirements, so here are some key points about each one.

The Suspended Operations Test

This first criterion for ERC eligibility applies to you if a government order restricted access to your place of business, made you unable to continue operations comparable to 2019 or caused you to reduce customer access or your hours of operation. If you operate an essential business, you may be considered to have a partial suspension of operations if more than a nominal portion of your business operations are suspended by a governmental order..

What exactly is a “nominal portion” of your essential business?

The IRS clarifies what constitutes a nominal portion of your business:

1. The gross receipts from that portion of your business operations is 10% or more of your total gross receipts. This is determined using your gross receipts from the same calendar quarter in 2019.
2. The hours of service performed by employees in that portion of your business is at least 10% of the total hours worked by all of your employees throughout your company. Similar to gross receipts, this is determined using the number of hours performed by employees in the corresponding 2019 calendar quarter.

 

To illustrate the nominal portion concept, let’s say you own a car dealership with an auto repair center. Your state’s guidance during 2020 and 2021 deemed the auto repair portion of your business as essential, but not the sales portion. During the second quarter of 2020, you were required to shut down your on-site sales division but were able to continue operating the auto repair portion of your business.

Given this scenario, and assuming that your auto sales made up 40% of your gross receipts and your auto repair division made up 60% in 2019, your business would fulfill the nominal portion requirement.

The Decline In Gross Receipts Test

Under the suspended operations test, both essential and nonessential businesses can potentially qualify, even if there is no decline of gross receipts. However, if your operations in 2020 and 2021 are not considered suspended, you can compare your gross receipts from 2019 to 2020 and 2021 to determine whether there was a qualifying decline. For ERC calculation purposes, a “significant decline in gross receipts” is defined as follows:

Period	Required Gross Receipts Decline
Between March 13, 2020 through December 31, 2020	Gross receipts must be less than 50% of the corresponding quarter in 2019, beginning when receipts are less than 50% and ending in the first quarter after which gross receipts are above 80% of the corresponding 2019 quarter
Between January 1, 2021 through September 30, 2021	Gross receipts must be less than 80% of the corresponding quarter in 2019. You may also use the alternative quarter election rule to compare a prior quarter to the 2019 period to assess whether there was a qualifying decline in gross receipts.

Before claiming The ERC, calculate qualified wages

After you’ve determined that you qualify for the ERC, either through suspended operations or a decline in gross receipts, you must calculate the total amount of your qualified wages. Qualified wages include wages and certain health expenses paid to employees during eligible periods. In both 2020 and 2021, the size of your company affects the percentage of your total qualified wages that are eligible for the ERC:

• 2020 ( 100 employees or fewer): You may claim the ERC for up to 50% of wages paid to working and non-working staff during your eligible periods.
• 2020 (over 100 employees): You may only claim the ERC for wages paid to non-working staff members during your eligible periods.
• 2021 (500 employees or fewer): You may claim the ERC for up to 70% of wages paid to working and non-working staff in eligible quarters.
• 2021 (over 500 employees): You may only claim the ERC for up to 70% of wages paid to staff who did not work during your ERC-eligible periods.

 

It’s worth noting that, for 2020, qualified wages are capped at $10,000 per employee for the year. In 2021, however, qualified wages are capped at $10,000 per employee per quarter.

Once you’ve determined your eligibility and calculated the appropriate percentage of qualified wages for your scenario, you can claim the Employee Retention Credit by filing an adjusted quarterly payroll tax return (Form 941-X) for the quarters in which you are eligible. You will need to decrease your deductible wages on your income tax return by the amount of your ERC tax credit.

How much can you save?

It’s easy to get lost in the numbers so here are some examples of the amounts that are possible through the ERC. Please note that this assumes that you qualify for the ERC through either the gross receipts test or suspended operations test.

Period	Qualified Wages for 10 employees	ERC Amount
2020 Q3	$100,000	$50,000
2021 Q1	$100,000	$70,000
2021 Q2	$100,000	$70,000
TOTAL	$300,000	$190,000

An opportunity too valuable to miss

Once you’ve determined your eligibility and calculated the appropriate percentage of qualified wages for your scenario, you can claim the Employee Retention Credit by filing an adjusted quarterly payroll tax return (Form 941-X) for the quarters in which you are eligible. You will need to decrease the amount of your deductible wages on your income tax return by the amount of your ERC tax credit.

If you want to learn more about the ERC, you can visit the IRS website and view the webpage entitled the “Employee Retention Credit – 2020 vs 2021 Comparison Chart” or contact your accountant for assistance with claiming the ERC.

Do not let this valuable opportunity pass you by and get the help you need to determine whether you can maximize this tax credit.

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Cassidy Jakovickas, CPA, is president and CEO of MBS Accountancy Corp. in Downtown Fresno.