ERC is a refundable payroll tax credit available to businesses for wages paid to employees

By Lauren Randazzo, CPA – Advisor

We have all heard in exhaust about the Payroll Protection Program (PPP), which was rolled out as part of the CARES Act during the pandemic’s early stages. When PPP was introduced, there was (and still is) a plethora of media coverage. Numerous Treasury Releases and IRS Notices subsequently followed to provide further clarity.

However, another stimulus is available for businesses which can also be extremely beneficial – the Employee Retention Credit (ERC). The CARES Act also introduced the ERC, and at that time if a business received PPP, it was ineligible to claim the ERC. However, this limitation was recently retroactively eliminated under the Consolidated Appropriations Act, 2021 signed into law on December 27, 2020.

So, what is the ERC? Simply put, the ERC is a refundable payroll tax credit available to businesses for wages paid to employees. But since nothing is as simple as it may seem in today’s world, we have prepared the following overview of the ERC’s main provisions and a few key items to consider:

Eligible Employers

All employers, including tax-exempt organizations, are eligible if they meet one of the following requirements (see below: eligible wages are calculated differently for small businesses):

  1. The business had to fully or partially close during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19.
  2. The business had a significant decline in gross receipts. The gross receipts are looked at on a quarterly basis and compared to 2019 (for 2020 and 2021).
    1. Significant Decline for 2020:  Gross receipts had to decline more than 50% compared to the same 2019 calendar quarter.
    2. Significant Decline for 2021:  Gross receipts had to decline more than 20% compared to the same 2019 calendar quarter.

Eligible Wages

Eligible wages are defined as employee wages and health care expenses paid during the applicable period up to a maximum of $10,000 per employee. Healthcare expenses are retroactively eligible to be included as wages for all employees, even if they did not receive any other wages (for example: furloughed employees). Note that wages used in calculating PPP loan forgiveness cannot be used toward calculating the ERC (no double-dipping). Therefore, to receive the ERC, a business will need to have paid qualified wages above the amount of the forgiven PPP loan used to pay other wages.

Wages are classified differently for small businesses and non-small businesses:

  1. For small businesses (100 or fewer employees for 2020; 500 or fewer employees for 2021) – all wages are included in the calculation.
  2. For larger employers (more than 100 employees in 2020 and more than 500 employees in 2021) – only wages paid to employees who were being paid and not providing services (i.e., not working) are included.

Calculating the Credit

The Consolidated Appropriations Act, 2021 enhanced the ERC by increasing the number of credits allowable and how often a business can claim them. For businesses receiving the ERC in 2020, the credit is equal to 50% of eligible wages up to $10,000 (or $5,000 of credit) per employee. For 2021, the enhanced credit is equal to 70% of eligible wages up to $10,000 (or $7,000 of credit) per employee, per quarter. Since the credit is available through June 30, 2021, this means a qualifying business can claim the ERC two times in 2021 for a total of $14,000 per employee!

As you can see, the second round of economic stimulus has dramatically enhanced and expanded the ERC, primarily by eliminating the rule that a business cannot benefit from both the PPP and the ERC. Employers should review their employee counts and operations to determine the extent to which they may be eligible for enhanced and/or increased ERC either in 2021 or by filing amended employment tax returns for qualified wages paid in 2020.

Compardo, Wienstroer, Conrad & Janes will continue to analyze this legislation and provide updates relevant to our clients. Our staff of diverse professionals stays informed to help you make better financial decisions. We serve Family Office, Professional Athletes and Family CFO clients. You can visit our website here.

© 2021 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Given the dynamic nature of the subject matter and the environment in which these materials were prepared, they are subject to change as additional legislation and government analysis come forth. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. These materials do not take into consideration your personal circumstances, financial or otherwise.