The signing of the Infrastructure Investment and Jobs Act on November 15, 2021 retroactively ended the Employee Retention Tax Credit (ERC) program for most businesses on September 30, 2021. Recovery Startup Businesses remained eligible for ERC to pay qualified wages through Dec. 31, 2021.The IRS also released guidance on the program's retroactive termination.
However, the ending of the ERC program does not impact the ability of a business to retroactively claim the credit.
In fact, businesses have up to three years from when the original Federal Quarterly Employment Tax Return, Form 941, was filed to request ERC. The IRS considers 941s filed on April 15 of the following year the returns are related to. All 2020 941s, if filed timely, would be considered filed on April 15, 2021. This provides businesses until April 15, 2024 to claim ERC related to any period after March 12, 2020 through the end of 2020.ERC claims related to 2021 would need to be filed no later than April 15, 2025.
This article highlights eligibility, qualified wages, how the credits work and more. It also delineates by law and date because, depending on whether you took a Paycheck Protection Program (PPP) loan and when you claim the credit, there are different requirements.
- What is ERC?
- Who qualifies for ERC?
- What wages qualify for the credit?
- How are tipped wages handled?
- How to avoid double dipping?
- How do the credits work?
- How can CAVU help?
What is the Employee Retention Credit?
The ERC is a refundable payroll tax credit designed to help businesses that, despite challenges posed by COVID-19, chose to keep their employees on payroll.
CARES Act – Passed in March 2020
For employers who qualify, including borrowers who took a loan under the initial Paycheck Protection Program (PPP), the ERC can be claimed against 50% of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and Dec. 31, 2020.
The maximum credit for 2020 is $5,000 per employee.
Consolidated Appropriations Act – Passed in December 2020
Employers who qualify, including PPP recipients, can claim ERC against 70% of qualified wages paid. Additionally, the amount of wages qualifying for the credit increased to $10,000 per employee per quarter for the first two quarters of 2021.
The maximum credit for 2021 is $7,000 per employee, per quarter.
American Rescue Plan Act – Passed in March 2021
The ERC remains at 70% of qualified wages up to a $10,000 limit per quarter, representing a maximum of $7,000 per employee per quarter. So, an employer can claim $7,000 per quarter, per employee for the first 3 quarters of 2021 meaning a maximum of $21,000 in ERC per employee in 2021.
After the Infrastructure Investment and Jobs Act passed, it changed the end date of the program for most businesses to Sept. 30, 2021. However, Recovery Startup Businesses are still eligible for ERC through the end of 2021.
A Recovery Startup Business is defined as a business that started after Feb. 15, 2020 and had an average of $1 million or less in gross receipts. Recovery Startup Businesses could be eligible to take a credit of up to $50,000 per quarter for the third and fourth quarters of 2021.
What Employers Qualify for the Employee Retention Credit?
Most employers, including colleges, universities, hospitals and 501(c) organizations, following the enactment of the American Rescue Plan Act can qualify for ERC.
Previously, the Consolidated Appropriations Act expanded qualifications in 2021 to include businesses who took a loan under the Paycheck Protection Program, including borrowers from the initial round of PPP who originally were ineligible to claim ERC.
Qualification is determined by one of three factors for eligible employers — and only one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:
- A full or partial suspension of the operation of the trade or business because of governmental orders limiting commerce, travel or group meetings (for commercial, social, religious, or other purposes) due to COVID-19. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
- An employer that experienced a significant decline in gross receipts. A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50% compared to the same calendar quarter of 2019).
Revenue to Exclude from Decline in Gross Receipts Calculation
IRS Revenue Procedure 2021-33 allows businesses to exclude the amount of the forgiveness of a PPP loan and the amount of a Shuttered Venue Operators Grant or a Restaurant Revitalization Fund grant from the definition of gross receipts solely for the purpose of determining eligibility to claim the ERC.
2020 Decline in Gross Receipts
Generally, if gross receipts in a calendar quarter are below 50% of gross receipts when compared to the same calendar quarter in 2019, an employer would qualify.
They are no longer eligible if in the calendar quarter immediately following their quarter gross receipts exceed 80% compared to the same calendar quarter in 2019.
2021 Decline in Gross Receipts
Businesses that experienced a 20% drop in gross receipts in the quarter compared to the same quarter in 2019.
If you are a new business, the IRS allows the use of gross receipts for the quarter in which you started business as a reference for any quarter in which they do not have 2019 figures because you were not yet in business.
Businesses also have the option of determining eligibility based on gross receipts in the immediately preceding calendar quarter (compared with the corresponding quarter in 2019).
Recovery Startup Business
To qualify as a Recovery Startup Business, the business must:
- Have begun carrying on trade or business after Feb. 15, 2020
- Have annual gross receipts that do not exceed $1 million
- Not be eligible for the ERC under the other two categories, partial/full suspension of operations or decline in gross receipts
- This factor can only be used to claim ERC in Q3 and Q4 of 2021 and is capped at $50,000 per quarter
Important Note: Due to all the changes to ERC, implemented by congress and the IRS, it is easy to fall victim to myths that may cause a business owner to wrongly conclude their business is not eligible for ERC. Do not fall victim to these myths. Read our 7 Common Myths about Employee Retention Credit blog to learn more and make sure you are making the right decision when considering your eligibility.
What Wages Qualify When Calculating the Employee Retention Credit?
Wages and any compensation, in general, that are subject to FICA taxes, as well as qualified health expenses, qualify when calculating the Employee Retention Credit. These must have been paid after March 12, 2020 and qualify for the credit if paid through Sept. 30, 2021 (Recovery Startup Businesses have until Dec. 31, 2021).
No Double Dipping. The credit can only be calculated on wages that were not used with PPP funds or COVID wages reimbursed by the government.
When determining the qualified wages that can be included, an employer must first determine the number of full-time employees in 2019.
For ERC, a full-time employee is defined as one that in any calendar month in 2019 worked at least 30 hours per week or 130 hours in a month. Employers would take the sum of the number of full-time employees in each calendar month and divide by 12 to get their 2019 full-time headcount.
This is NOT a full time equivalent calculation and employees that were under 30 hours a week or 130 hours in a month should not be factored into the full-time headcount in determining ERC eligibility.
Qualified Wages in 2020
Those who have more than 100 full-time employees (in 2019) can only use the qualified wages of employees not providing services because of suspension or decline in business. Furthermore, any wages paid for vacation, sick or other days off based on the employer’s current policy cannot be included in qualified wages for the larger employers. Basically, large employers can only receive credits on wages paid to employees who were not working.
Employers with 100 or fewer full-time employees can use all employee wages including any time paid not being at work with the exception of paid leave provided under the Families First Coronavirus Response Act.
Qualified Wages in 2021
Employers with 500 or fewer full-time employees (in 2019) can use all employee wages, including any time paid not being at work with the exception of paid leave provided under the Families First Coronavirus Response Act, in order to calculate ERC in 2021.
Are Tipped Wages Included in Qualified Wages?
Yes, tips are to be included in qualified wages if these wages were subject to FICA.
Are Owner/Spouse Wages Included in Qualified Wages?
It was well understood from a previous statute and previous IRS guidance that related individuals to a majority owner were not included in qualified wages (see IRS FAQ #59 for specifics). However, the owner and spouse wages were unclear. Related individuals are:
- Child or a descendant of a child
- Brother, sister, stepbrother or stepsister
- Father or mother, or an ancestor of either
- Stepfather or stepmother
- Niece or nephew
- Aunt or uncle
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
IRS Notice 2021-49 issued in August of 2021 clarified that attribution rules must be applied to assess whether the owner or spouse’s wages can be included for the ERC. Essentially owners and their spouse are considered a majority owner, then their wages are not qualified wages for ERC.
Keep in mind, these rules the IRS clarified apply to all quarters for ERC. Consequently, if wages were previously miss-categorized as qualified wages for ERC, then amendments to the 941 would be necessary, but not required, to correct any inadvertent errors.
How to Avoid Double Dipping?
- There is no double-dipping for credits. Employers who take the Employee Retention Credit cannot take credit on those same qualified wages for paid family medical leave.
- If an employee is included for the Work Opportunity Tax Credit, they may not be included for the employee retention credit.
- ERC can only be taken on wages that are not forgiven or expected to be forgiven under PPP.
How do the Credits Work?
Currently, the only way to receive ERC is through an amended Federal Quarterly Employment Tax Return, Form 941-X. These can only be filed on paper and must be mailed to the IRS.
This is different from traditional tax credits that reduce future tax due. ERC is issued in the form of a paper check from the IRS to the business, for each quarter you file for ERC credits. Since ERC is a refundable credit, the amount you receive from the IRS has nothing to do with the amount of tax paid in.
How Can CAVU HCM Help?
We want to make this process as easy as possible for businesses to receive this valuable tax credit. For CAVU to help, businesses must complete our ERC service agreement and complete the following:
- Certify they are eligible for ERC
- Determine for what time period (begin date and end date of eligibility)
- Provide PPP loan amounts used on wages
- Provide names of employees that are over 50% owners of the business and any relatives to those owners that are on payroll
From there we go to work on analyzing the payroll data to calculate the credit amount by the employee. We assign wages by employee to both PPP dollars used on wages and, for the purpose of calculating ERC, ensure we are not double-dipping from other COVID sick pay credits.
We then complete and file amended Federal Quarterly Employment Tax Returns (Form 941-x) for each quarter in which the business is eligible. Since the IRS only allows these returns to be filed on paper and mailed in, we will send certified mail and track the status of the refund with the IRS until you receive the funds.
Only after our clients receive their checks from the IRS, we will collect our fee from the client. The IRS is taking between 5-9 months currently to process these amended returns and issue checks.
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