Think Your Essential Business Is Ineligible For The ERC? Think Again.
August 7, 2023
Courtesy of SBAM Approved Partner, Occams Advisory
To help businesses weather the storm of COVID19, the government implemented various relief measures, including the Employee Retention Credit (ERC). However, many essential businesses are unaware that they may still qualify for this credit. In this article, we’ll explore the ERC and how essential businesses can take advantage of it.
The Employee Retention Credit is a refundable tax credit that was implemented as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. It was designed to help businesses keep their employees on payroll during the pandemic. Initially, the credit was only available to businesses that did not take Paycheck Protection Program (PPP) funding, and only covered wages paid in the last three quarters of 2020. However, the credit was expanded to include businesses that received PPP funding and to cover wages paid in the first three quarters of 2021.
What is the Employee Retention Credit?
The Employee Retention Credit is a tax credit that allows eligible businesses to claim a credit of up to $5,000 per employee for wages paid between April 1, 2020 and December 31, 2020 and up to $7,000 per employee per quarter for wages paid between January 1, 2021, and September 30, 2021. The credit is calculated as a percentage of qualified wages up to $10,000 per employee per quarter, depending on the year. At a maximum, the credit is worth up to $26,000 per employee.
Who Qualifies for the Employee Retention Credit?
To qualify for the Employee Retention Credit, a business must meet one of two criteria:
1. The business was fully or partially suspended due to government orders related to COVID-19, OR
2. The business experienced a significant decline in gross receipts, which is defined as a decline in gross receipts of more than 50% in 2020 or 20% in 2021 for a calendar quarter compared to the same quarter in 2019.
My Business is Essential, Can I Still Qualify?
Yes, essential businesses can still qualify for the Employee Retention Credit if they meet the criteria mentioned above. While many essential businesses were not fully suspended due to government orders, they may have been partially suspended or experienced a significant decline in revenue. It’s important for essential businesses to understand that they may be eligible for this credit and should consult with a tax advisor to determine their eligibility.
How to Calculate the Employee Retention Credit
To calculate the Employee Retention Credit, eligible businesses can claim a credit of up to 50% of qualified wages paid to each employee, up to a maximum of $10,000 in wages per employee in 2020, or up to 70% of qualified wages paid to each employee, up to a maximum of $10,000 in wages per employee, per quarter for the first three quarters of 2021. The credit is calculated on a quarterly basis and can be claimed on an employer’s amended federal payroll tax return. It’s important to note that wages paid with forgivable Paycheck Protection Program (PPP) loan proceeds are not eligible for the ERC.
Here are two real-life scenarios that demonstrate how the Employee Retention Credit can benefit businesses:
Scenario 1: ABC Company is an essential business that experienced a significant decline in revenue due to the pandemic. In Q2 2020, the company had a gross receipt of $75,000 or less, compared to $150,000 in Q2 2019. ABC Company can claim a credit of up to $5,000 per employee for wages paid in Q2 2020.
Scenario 2: XYZ Company is a restaurant that was fully suspended due to government orders related to COVID-19. During the suspension, the restaurant paid wages to its employees to clean and maintain the premises. XYZ Company can claim a credit of up to $5,000 per employee for wages paid during the suspension in 2020. Additionally, the restaurant may be eligible to claim up to $7,000 per employee for the first three quarters of 2021 if local, state, or federal orders are determined to have partially suspended the operations of the business.
The Employee Retention Credit is a fully refundable tax credit that is intended to reward eligible businesses for keeping their employees on payroll during the pandemic. Many essential businesses may be unaware that they qualify for this credit, but it’s important to understand the criteria and consult with an experienced tax advisor to determine eligibility. By taking advantage of the Employee Retention Credit, businesses can benefit from a significant refund and continue to support their employees.
Sources and Citations
1.IRS. “Employee Retention Credit.” https://www.irs.gov/coronavirus/employee-retention-credit
2. IRS. “COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs.” https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs
3. SBA. “Coronavirus Relief Options.” https://www.sba.gov/funding-programs/loans/coronavirus-relief-options