The Employee Retention Credit Can Provide Up to $5k per FTE Oct. 31 2020
September 18, 2020
Businesses that either did not receive a loan through the Paycheck Protection Program (“PPP”) or that repaid their PPP in a timely fashion should explore their eligibility for the Employee Retention Credit (“ERC”), one of the tax-relief provisions of the CARES Act passed on March 27, 2020.
The ERC is designed to encourage businesses experiencing severe business disruptions as a result of COVID-19 to retain their full-time employees by providing a fully refundable tax credit to companies. This credit can provide employers with up to $5,000 per full-time employee (“FTE”) through the end of the year, which is a substantial financial benefit for organizations.
Companies can claim the ERC on their quarterly Form 941, Employer’s Quarterly Federal Tax Return, but that deadline is swiftly approaching! For the third-quarter 2020, Form 941 is due on or before October 31, 2020, so you should act now if you think you may qualify for this benefit.
With the October 31 deadline approaching for third-quarter filing, now is a good time to review whether your company can take advantage of the ERC. Additionally, if you haven’t evaluated your eligibility before, you can use this opportunity to determine if your company has a refund opportunity from previous quarters.
Who is an Eligible Employer
The first step in determining whether your company can take advantage of the ERC is to ascertain whether your company is an “Eligible Employer” as defined by the CARES Act. In order to meet the definition of Eligible Employer, your company must have experienced one of the following scenarios:
- Your business was either fully or partially suspended due to orders from the Federal government, or a state government having jurisdiction over the employer, limiting commerce, travel, or group meetings due to COVID-19; or,
- Your business experienced a significant decline in gross receipts. Such a decline occurs when an employer’s gross receipts fall below 50% of what they were for the same calendar quarter in 2019. An employer will remain eligible until its gross receipts exceed 80% of its gross receipts for the same quarter in 2019.
These eligibility rules are somewhat vague, and therefore adaptable, especially due to the uncertain and evolving rules around government shutdowns. Even if your company was not directly required to close, any government-imposed restrictions due to COVID-19, such as restrictions on commerce, travel, or gatherings, that prevent operating at a normal capacity could impact business enough to deem your company partially suspended. Additionally, a government order imposed on a member of your company’s supply chain could have resulted in your company not operating at its normal capacity since you were unable to acquire needed materials and supplies or provide full service to your customers. If one of these scenarios sound familiar, your company may be an Eligible Employer for purposes of the ERC from both direct and indirect situations resulting from the impact of COVID-19.
However, the CARES Act also clearly defines two groups who are explicitly excluded from eligibility. If your company received a loan through the PPP, or if your company operates as a self-employed individual with no employees, then you cannot qualify as an Eligible Employer and you cannot claim the ERC.
How can you benefit from the ERC?
If your company meets the Eligible Employer definition, the next step is to determine the size of your credit by calculating the “Qualified Wages” that your company paid. While you can leave the specific calculation and filing process up to a knowledgeable tax advisor like Aprio, here are the key things you should know about Qualified Wages.
- Eligible Employers can claim an ERC for 50% of Qualified Wages paid to employees after March 12, 2020, and before January 1, 2021, for a maximum ERC of $5,000 per employee. These caps are cumulative including all 2020 quarters.
- Determining Qualified Wages is dependent on the size of your company.
- If your company has more than 100 employees: your credit will be based on the compensation paid to employees who are not working as a result of the two qualifying situations explained above.
- If your company has 100 or fewer employees: your credit will be based on all compensation paid during the period when your operations were affected by one of the two qualifying scenarios, whether the employees were working or not.
- Some analysis must be done to properly determine the number of employees your company employs for purposes of the 100-employee threshold.
- Qualified Wages include compensation provided to an employee after March 12, 2020 and before January 1, 2021
- Qualified wages may also include the Eligible Employer’s qualified health plan expenses
- You cannot calculate your ERC credit based on the same wages for other wage-based tax credits. In other words, wages used to calculate paid sick and family leave credits under the FFCRA or Work Opportunity Tax Credits, for example, may not also be considered Qualified Wages for the ERC.
If you are a business owner that thinks the ERC may be helpful, connect with an Aprio expert to help calculate and maximize your potential benefit. Aprio’s experts have vast experience with calculating and claiming payroll tax credits and have been on the forefront of helping clients navigate the adverse financial impacts of the Coronavirus pandemic.
About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.