What is the Employee Retention Credit (ERC)?
The ERC is a refundable credit given to employers for maintaining their workforce on payroll during the Covid pandemic. It was created under the CARES (Coronavirus Aid, Relief, and Economic Security (Act) in March 2020. Initially, it was not available to companies who also received money from PPP (Paycheck Protection Program), but was later revised so that PPP recipients are now eligible to receive the ERC.
How much is the ERC?
The amount of ERC depends on the tax-year and is based on qualified wages. Qualified wages are compensation paid to full-time employees and excludes wages paid to owners. In addition, wages paid with PPP funds are not eligible. The ERC is 50% of qualified wages up to a maximum of $10,000/year per employee paid between March 13, 2020 through December 31, 2020. The Consolidated Appropriations Act (CAA) expanded and increased the ERC to 70% of qualified wages up to a maximum of $10,000/quarter for 2021 until September 30, 2021. This means the maximum ERC per employee for 2021 is $21,000 ($7,000 x 3 quarters), which is still higher than the $5,000 per employee maximum ERC for 2020.
How do you qualify for the ERC?
According to the IRS, to qualify for the ERC, a business must experience:
- A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
- 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%).
How to apply for the ERC?
To apply for the ERC, you must file an amendment to your filed IRS form 941 for each quarter your business qualifies for the credit. Wages paid from March 13, 2020 to March 31, 2020 should be included in the second quarter 2020 amended 941. To amend a form 941, use form 941x.
Is the ERC taxable?
While the ERC may seem like free money, it is not. According to the IRS notice Notice 2021-49 and Notice 2021-20, “an employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit.” That means that the employer must file an amended tax return for the year the ERC is claimed to reduce the expenses taken and thereby increase the net income to pay tax on the ERC credit.
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