Businesses that are not eligible for the Paycheck Protection Program (PPP) loan, or are perhaps unable to secure the funds, should consider whether and to what extent they qualify for the Employee Retention Credit.
Businesses that received PPP financing cannot receive an Employee Retention Credit (ERC). If a business has repaid its PPP loan by the May 14th safe harbor deadline, then it will be treated as though it had not received a PPP loan for purposes of determining ERC eligibility. However, even if you received the PPP loan, you can still defer employment taxes (specifically the Social Security portion applicable to the business) until the date the loan is forgiven. The amount deferred before that date can be deferred as follows: 50% until December 31, 2021, and the remainder until December 31, 2022.
ERC was designed to encourage businesses to keep employees on their payroll and is worth 50 percent of qualifying wages up to $10,000 that are paid by an eligible business. The credit is available to all qualified businesses regardless of size, including tax-exempt organizations.
Qualifications
There are two qualifiers for businesses:
However, once the gross receipts of the business goes above 80 percent of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
Calculating ERC
The amount of the credit is 50 percent of qualifying wages paid up to $10,000 in total. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer-provided health care, to be discussed further later in this article.
Qualifying wages are wages that are based on the average number of employees in a business in 2019. There are two different measures for businesses, depending on size:
Businesses with less than 100 employees
If the business had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full-time work, the business still receives the credit.
Businesses with more than 100 employees
If the business had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
Claiming ERC
While many tax credits are available when filing a tax return, ERC works differently in that businesses can be reimbursed immediately by reducing their required payroll tax deposits, and claiming the credit on their quarterly payroll tax Form 941, Employer’s Quarterly Federal Tax Return. The reporting period for claiming ERC commences with the second quarter of 2020. Wages paid through December 31, 2020, are also eligible for the credit.
If the businesses’ employment tax deposits are not sufficient to cover the credit, the business may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19
Health Insurance Coverage Component of ERC
Included in qualify wages, and the $10,000 of per employee qualifying wages limit (maximum credit of $5,000), is allocable health plan benefits, including payments to or on behalf of all employees.
Businesses that averaged over 100 employees in 2019 can take the ERC on qualifying wages paid to employees for the time the employees did not provide service to the business. This limits health plan costs eligible for the credit to the portion allocable to such qualifying wages or non-working time.
For business that averaged 100 or fewer employees in 2019, all wages paid are qualifying wages. Employer-provided health insurance paid or incurred after March 12, 2020, and before January 1, 2021, during qualifying periods will qualify whether the employees are working or not.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.