The Employee Retention Credit (ERC) was created under the CARES Act to help companies keep workers on their payroll throughout the pandemic. At the time the law was passed, there was some grey area regarding how parts of the law should be applied. Later in 2021 changes came that altered some aspects of the CARES Act, including the ERC.
Although there may be additional changes with upcoming legislation, the IRS has published a great deal of information to clarify the ERC. Additionally, the IRS issued Notice 2021-49 which provides ERC guidance. Since additional legislation may impact the ERC, you’ll want to check with the IRS and your tax advisor to be sure you’re up to date.
1.What is the ERC?
The ERC is a tax credit created to help companies that were impacted by COVID-19. ERC is not a loan or a tax deferral. Money received under the ERC does not need to be paid back.
2.How much is the ERC?
Employers that are eligible can claim a refundable tax credit up to 70% of the first $10,000 in qualified wages paid to employees after December 31, 2020, through June 30, 2021. This equals up to $7,000 per employee when all eligibility requirements are met. The maximum ERC for 2021 is $28,000 per employee that receives qualifying wages.
For 2020, during Q2(March 13-31, 2020) Q3 and/or Q4, eligible employers may receive a credit equal to 50% of the first $10,000 of qualified wages per employee for all qualifying quarters. The maximum ERC for 2020 is $5,000 per employee that received qualified wages.
It is important to remember that this information is current as of publication, but changes in legislation may impact the ERC. Determining eligibility is complex, and not every company will be able to qualify to receive the ERC.
3.Who is eligible to claim the ERC?
As of November 16, 2020, for the purposes of ERC, eligible employers are those that carry on trade or business during the 2020 calendar year, including tax-exempt organizations, that either:
- Fully or partially suspended operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority that resulted in limited commerce, travel, or group meetings, including commercial, social, religious, or other purposes, because of COVID-19;
- Experience a significant decline in gross receipts during the calendar quarter.
A few things to note about ERC eligibility:
- Governmental employers are not eligible for the ERC.
- Tribal government and tribal entities may be eligible for the ERC depending on several factors.
- Those that are self-employed are not eligible for the ERC for their own self-employment earnings but they may be able to claim the ERC for wages paid to employees.
ERC eligibility and the amount of the tax credit can be complicated to determine. A tax professional, or our can help you see if you may qualify. Contact us to learn more about ERC eligibility.
4.What does “partially suspended” mean for the purposes of the ERC?
The Employee Retention Credit is intended to help companies that were impacted by COVID-19. For the purposes of the credit, partial suspension means an appropriate governmental authority-imposed restrictions due to COVID-19 that left a business unable to continue all of their typical operations. If a business could still continue some of their operations, but had to limit, restrict or suspend others, it is partially suspended.
Additional ERC Information
But first, here are a few things to note:
- You can be eligible for the ERC even if you obtained a PPP loan.
- The ERC is NOT a loan or deferral, it’s a credit and it does not need to be repaid.
- Eligibility is based on a reduction of revenue OR partial suspension, not both.
- The number of employees does not affect ERC eligibility, but size does play a role in determining which wages can be used to calculate the credit.
Determining ERC eligibility and the amount of the credit can be complicated. To maximize your credit, and ensure you’re following the law correctly, you may want to consult with a tax professional.
The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.