The Employee Retention Credit (“ERC”) continues to provide a wide variety of employers with lucrative refundable payroll tax credits for qualified wages paid to employees in 2020 and 2021. Businesses can still apply for the ERC by filing an amended Form 941X (Quarterly Federal Payroll Tax Return) for the quarters during which the company was an Eligible Employer.

The ERC is a refundable credit that businesses can claim on qualified wages, including certain health insurance costs, paid to employees.

CARES Act – 2020 

For employers who qualify, including borrowers who took a loan under the initial PPP, the credit can be claimed against 50 percent of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and Dec. 31, 2020.

Consolidated Appropriations Act – 2021

Employers who qualify, including PPP recipients, can claim a credit against 70% of qualified wages paid. Additionally, the amount of wages that qualifies for the credit is now $10,000 per employee per quarter for the first two quarters of 2021.Can I get both the ERC and PPP Loan?

Yes. While an employer may not include wages funded by a PPP loan in the ERC calculation, PPP funds only apply to eight to ten weeks of wage expenses. The ERC eligibility periods are longer. PPP loans can also fund non-wage expenses.

For ERC purposes.

PPP funding may be allocated to wages that would not generate any ERC (e.g., to owners of the company or to wages in excess of $10,000 in one of the four ERC credit-generating periods).

American Rescue Plan Act – 2021

The credit remains at 70% of qualified wages up to a $10,000 limit per quarter so a maximum of $7,000 per employee per quarter. So, an employer could claim $7,000 per quarter per employee or up to $21,000 for 2021 after the passage of the Infrastructure Investment and Jobs Act 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 the year. A Recovery Startup Business is one that started after Feb. 15, 2020 and, in general, had an average of $1 million or less in gross receipts. They could be eligible to take a credit of up to $50,000 for the third and fourth quarters of 2021.

Most employers, including colleges, universities, hospitals and 501(c) organizations following the enactment of the American Rescue Plan Act, can qualify for the credit. Previously, the Consolidated Appropriations Act expanded qualifications to include businesses who took a loan under the Paycheck Protection Program PPP including borrowers from the initial round of PPP who originally were ineligible to claim the tax credit.

Qualification is determined by one of two factors for eligible employers — and one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:

1. A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. 

Some businesses, based on IRS guidance, do not meet this factor test and would not qualify.

However, any of these businesses still may qualify for the credit with the second factor test.

2. An employer that has a significant decline in gross receipts.

On Tuesday, Aug. 10, 2021, the IRS released Revenue Procedure 2021-33 that provides a safe harbor under which an employer may 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. Employers must apply the safe harbor consistently across all entities.

No. The Employee Retention Credit is a fully refundable tax credit that eligible employers claim against certain employment taxes. It is not a loan and does not have to be paid back.

• CARES Act – 2020
  • 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.
• Consolidated Appropriations Act, 2021
  • Beginning in 2021, businesses must be impacted by forced closures or quarantines or have seen more than 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 which they do not have 2019 figures because you were not yet in business.
• American Rescue Plan Act – 2021
  • In addition to eligibility requirements under the Consolidated Appropriations Act, 2021, business also have the option of determining eligibility based on gross receipts in the immediately preceding calendar quarter (compared with the corresponding quarter in 2019).

3. Recovery Startup Business

• American Rescue Plan Act – 2021
  • 3rd and 4th quarter 2021 only — a third category has been added. Those entities that qualify may be entitled to up to $50,000 per quarter.

To qualify as a Recovery Startup Business, one 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

The IRS notice 2021-49 clarified that Recovery Startups may use all qualified employee wages for purposes of the credit, regardless of the number of employees. It should also be noted that determining if this category applies is assessed for each quarter. So, if one of the other two categories — gross receipt decline or full/partial suspension — applies to 3rd quarter but not 4th, they would not be a recovery startup in 3rd quarter, yet they may still qualify as a recovery startup in 4th quarter.

The IRS notice is important in understanding how to apply upcoming changes to Form 941 necessary to claim the credit. Form 941-X will be used to retroactively file for the applicable quarter(s) in which the qualified wages were paid.  

• Infrastructure Investment and Jobs Act – 2021
  • This law removes a condition of eligibility. Recovery startups are no longer subject to the business closure or gross receipts reduction to qualify. Essentially all RSBs are eligible in 4th quarter. 

Reindeer Consultants can help businesses determine if they qualify to claim the credit.

Wages/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). 

Remember, the credit can only be taken on wages that are not forgiven or expected to be forgiven under PPP.

When determining the qualified health expenses, the IRS has multiple ways of calculating depending on circumstances. Generally, they include the employer and employee pretax portion and not any after-tax amounts.

When determining the qualified wages that can be included, an employer must first determine the number of full-time employees.

For the purposes of the employee retention credit, 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 (this is the monthly equivalent of 30 hours per week) and the definition based on the employer shared responsibility provision in the ACA.

• Employers who were in business the entire calendar year in 2019 or 2020 would take the sum of the number of full-time employees in each calendar month and divide by 12.
• An employer who started a business during 2019 or 2020 determines the number of full-time employees by taking the sum of the number of full-time employees in each full calendar month in 2019 or 2020 in which the business operated and divide by that number of months.
• An employer who started a business in 2021 determines the number of full-time employees by taking the sum of the number of full-time employees in each full calendar month in 2021 that the business operated and divides by that number of months.

Note: The employee calculation of full-time equivalent (FTE) used for the PPP forgiveness report is not calculated the same way as a full-time employee for the employee retention credit. If you are an accounting professional, do not provide your clients with the PPP Forgiveness FTE information. Also, remember that if a client has taken and will be forgiven for a PPP loan, they may now be eligible for the employee retention credit on certain wages.

CARES Act – 2020

Those who have more than 100 full-time employees 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, employers can only use this credit on employees who are not working.

Employers with 100 or fewer full-time employees can use all employee wages — those working, as well as any time paid not being at work with the exception of paid leave provided under the Families First coronavirus Response Act.

Consolidated Appropriations Act – 2021

This law increased the employee limit to 500 for determining which wages are applicable for the credit.

American Rescue Plan Act – 2021

This law allows certain hardest-hit businesses — severely financially distressed employers — to claim the credit against all employee’s qualified wages instead of just those who are not providing services. These hardest hit businesses are defined as employers whose gross receipts in the quarter are less than 10% of what they were in a comparable quarter in 2019 or 2020. This only applies to the third quarter of 2021 for businesses that aren't Recovery Startup Businesses.

The IRS does have guardrails in place to prevent wage increases that would count toward the credit once the employer is eligible for the employee retention credit.

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

Notice 2021-49 clarified that attribution rules must be applied to assess whether the owner or spouse’s wages can be included for the ERC. Essentially, the assessment is dependent on these related individuals previously mentioned and, when the attribution rules are applied, if any of these individuals would be considered a majority owner. If they 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 to correct any inadvertent errors.

• 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 Leaving.
• If an employee is included for the Work Opportunity Tax Credit, they may not be included for the employee retention credit.

Remember, the credit can only be taken on wages that are not forgiven or expected to be forgiven under PPP.

• American Rescue Plan Act — 2021

Shuttered Venue Operators Grant (SVOG) or Restaurant Revitalization Fund (RRF) recipients may not treat any payroll costs that they take into account in connection with either program to justify use of the grant, as qualified wages for the employer retention tax credit in the third quarter 2021 (Recovery Startups still have the fourth quarter).

Keep in mind, an eligible employer receiving these grants must retain records justifying where the funds were used. The funds must be used for eligible uses no later than March 11, 2023 for RRF while the SVOG dates vary (June 30, 2022 is the latest).

So, employer’s considering which credits or funding source to take should evaluate the interaction of these vehicles to determine what is financially best for their business.

A wide range of employers qualify for the ERC, including businesses in the following industries:

• Education
• Government Contractors
• Healthcare and Life Sciences
• Hospitality and Retail
• Industrial
• Not-For-Profit
• Professional Services
• Real Estate and Construction
• Technology

Yes. Employers using a PEO are still entitled to claim the Employee Retention Credit.