The Employee Retention Credit (ERC or ERTC), is an exciting new initiative by our current administration to encourage growth across various industries, as a time that couldn’t be more critical. Employers who kept their workforces intact during the COVID-19 pandemic, are the ones that benefit from the employee retention credit.
For many businesses, the matter is still a mystery. There are many concerns that need to be address for many employers. As you’ll see in this article, there are many layers to this program, and it’s rather cumbersome from a business owner to figure out on their own.
Many Accountants don’t have the expertise to navigate the requirements for this credit, which leaves many small to medium-sized businesses that need these funds the most, left out in the rain.
Now we’re not talking about a small amount of monies available. Employers can receive a credit of up to $26,000 per employee, that they kept on the books during the Pandemic.
For many businesses, having access to these funds could be the difference between closing the doors in 6 months, and exceeding Pre-Pandemic Revenues. Infusing a business with an extra $50,000, $100,000 or more, to devote to paying off business lines of credit, restocking inventory, or launching potent marketing campaigns. The Employee Retention Credit has the potential to propel a business’ revenue through 2022, 2023 and beyond, to new heights!
How does the Employee Retention Credit works?
When the CARES Act was passed in March 2020, businesses with less than 100 employees were now able to potentially qualify for the ERC.
- Those businesses whose operations were partially or fully suspended due to a COVID-19-related government shutdown order
- Those businesses whose gross receipts were less than 50% compared to the same quarter in 2019.
The ERTC credit was set to equal 50% of “qualified wages” which included health care perks up to $10,000 per eligible employee until December 31, 2020. As a result, the maximum benefit for 2020 is $5,000 for each employee.
The Consolidated Appropriations Act (CAA), which was passed in December of 2020, extended the credit for eligible employers that continue to pay wages throughout COVID-19 closures or recorded lowered revenue through June 30, 2021. However, there were other modifications made by the legislation to the ERC.
Beginning January 1, 2021, the CAA boosted the credit amount to 70% of qualifying wages and raised the per-employee qualified wage limit from $10,000 per year to $10,000 per quarter. In other words, you may claim a credit of up to $7,000 each quarter for each employee.
The CAA also raised the minimum required year-over-year gross receipts reduction from 50% to only 20%. It lowered the threshold for determining whether a firm is a “large employer,” thus subjecting it to a more stringent qualified wage base calculation, from 100 to 500 workers.
Paycheck Protection Program (PPP) loan borrowers were not permitted to claim ERCs under the CARES Act. The CAA also stated that employers who obtain PPP loans continue to qualify for the ERC for compensated wages not paid with forgiven PPP funds.
New Changes to the Program
The ERC will continue until the end of 2021, thanks to the ARPA. It includes some modifications that only apply to the third and fourth quarters of the year. The credit will now be applied against an employer’s share of Medicare taxes rather than Social Security taxes; excess credits are still refundable.
A recovery startup business generally is an employer that:
- Started operation on or after February 15, 2020, and
- Average annual gross receipts are less than/equal to $1 million.
These employers may take the credit without having to shut down operations or reduce receipts, however it’s restricted to $50,000 each quarter.
The ARPA also exempts firms with less than 10% of gross revenues for 2021 when compared to the same period in 2019 from fines.
Any wages paid to an employee during any calendar quarter, regardless of employer size, may be considered qualified earnings. Otherwise, for the purpose of calculating qualifying pay, the ARPA continues to separate between major corporations and tiny firms.
Qualified wages are those paid to a worker who isn’t providing services owing to the circumstances that made the employer eligible for the ERC. For organizations with more than 500 full-time staff throughout 2019 (or 2020 if the firm didn’t exist in 2019), qualified compensation is defined as money paid to a non-performing employee who is not providing services
Wages that are paid on the basis of competence rather than seniority, such as bonuses and commissions, become qualified salaries when an employee’s pay is docked.
Full or Partial Shutdown
The IRS issued further guidance on the ERC in early March 2021, before the ARPA was enacted. It gives some assistance for determining whether operations were shut down due to a COVID-19-related government order.
The IRS has previously acknowledged that “more than a trivial amount” of operations have to be halted. The IRS added in Notice 2021-20 that when
- Gross receipts during shutdown period are 10% or more of total gross receipts,
- Hours of service by employees during suspended operations are 10% or more of total hours of service, or
- Modifications to operations resulted in a reduction of at least 10% or more of the Employer’s ability to provide those goods or services.
Not an easy process
The precise amount of your ERC will vary depending on the period, your number of employees, and other factors. Wisefunders can help connect you with CPA’s who are experts at properly calculating your credit and won’t leave money on the table, and get exactly what you’re supposed to. Click here to fill out a short questionnaire to discover how much funds are available to you.
All information on this website should not be considered professional advice. The information above is subject to change. Wisefunders is not a CPA firm. We only help connect you with CPA’s or Funders that specialize in helping business acquire Capital, and are compensated for the referral.
