The Employee Retention Tax Credit (ERC): What Small Businesses Need to Know

Date: June 11, 2021

What Is It?

  • The ERC is a refundable and advanceable tax credit for small businesses based on the number of qualifying employees.
  • If eligible, businesses can claim the ERC for qualifying wages paid during March 13, 2020 – December 31, 2021.
    • This means the credit is available for wages paid in the following quarters:
      • 2020 – Final few weeks of Q1. Fully for Q2, Q3, and Q4
      • 2021 – All 4 quarters.

Do I Qualify?

To qualify for the ERC in a given 2020 quarter, a business must have experienced either:

  1. At least a 50% decline in gross receipts in a given quarter compared to the same quarter in 2019. OR
  2. A full or partial suspension of business operations due to a government order.

To qualify for the ERC in a given 2021 quarter, a business must have experienced either:

  1. At least a 20% decline in gross receipts in either:
    1. A given quarter compared to the same quarter in 2019; OR
    2. The immediately preceding quarter.
  2. OR A full or partial suspension of business operations due to a government order.

For Q3 and Q4 of 2021 only, a business can utilize either of these special qualifying criteria:

Qualify as a Recovery Startup Business, meaning the employer:

  • Began operations after February 15, 2020,
  • The average annual gross receipts of the employer for the 3-year taxable period preceding the calendar quarter claiming the credit does not exceed $1,000,000, AND
  • Does not qualify under the gross receipts or suspension of operations criteria above.
  • A Recovery Startup Business is eligible for a maximum of $50,000 per quarter.

Qualify as a Severely Financially Distressed Employer, meaning the employer:

  • Suffered at least a 90% decline in gross receipts in a specific quarter compared to the same quarter in 2019.
  • A Severely Financially Distressed Employer can include all wages paid during the qualifying quarter for purposes of the ERC.

How Much Is It?

  • 2020 Maximum credit is $5,000 per employee for the entire year. 50% of qualifying wages with a maximum qualifying wage amount of $10,000 per employee.
    • 50% x 10,000 = $5,000 credit per employee
  • 2021 Maximum credit is $7,000 per quarter, per employee – $28,000 total for the year. 70% of qualifying wages with a maximum qualifying wage amount of $10,000 per employee.
    • 70% x 10,000 = $7,000 credit per employee, per quarter.
  • Total Up to $33,000 per employee!!

***If your business had over 100 full time employees in 2020, or over 500 in 2021, then you need to be aware that the ERC only applies to employees not working but continuing to get paid.

How to Claim It?

  • For 2020 and past quarters:
    • File an amended quarterly tax return, Form 941-X, and receive a check refund
  • For upcoming or current quarters:
    • Claim on quarterly tax return Form 941 and either reduce payroll deposits in anticipation of quarterly tax filing, receive a check after filing, or carry forward the credit to a future quarter and reduce those payroll deposits
    • Claim on Form 7200 and receive an advance of funds

Step-By-Step Process

  1. Determine whether you qualify for the ERC in any 2020 or 2021 quarter through the gross receipts reduction test (50% for 2020 and 20% for 2021)
    1. The gross receipts qualifying test is the most business friendly If you qualify via a reduction in gross receipts, you will AUTOMATICALLY qualify for the following quarter and every subsequent quarter until gross receipts reach 80% of comparable 2019 quarter levels.

    If not, determine if you qualify based on the suspension of operations test, or alternatives mentioned in the “Do I Qualify?” section.

  2. Determine qualifying wages in your qualifying quarter/s.
    1. Exclude wages paid for with PPP funds or FFCRA credits
    2. Exclude employees whose wages do not qualify such as related individuals (question 59)
  3. If your wages paid do not meet the $10,000 maximum, include allocable qualified health plan expenses.
  4. Calculate the ERC for each qualifying employee 50% of qualified wages in 2020 (up to $5,000) and 70% of qualifying wages in 2021 (up to $7,000)
  5. Calculate the ERC amount for all employees.
  6. Decide how to claim the credit and do so.
    1. Forms 941-X, 941, or 7200

 

Additional NFIB Resources on the ERC

 

Updated June 15, 2021

Related Content: Legal - Blog | Coronavirus | taxes

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