The Employee Retention Tax Credit: It’s Not Too Late

The Employee Retention Credit (ERC) was introduced last year in the CARES Act as a lucrative incentive for business owners. It has since been extended and modified by both the Consolidated Appropriations Act and American Rescue Plan Act earlier in 2021. However, it’s been reported that many business owners who may be eligible for the credit, still aren’t taking advantage of it, and are leavings tens of thousands of dollars unclaimed. The bottom line: Don’t assume you don’t qualify!

Latest ERC Changes as of November 2021

President Biden recently signed the Infrastructure Investment and Jobs Act which eliminates the 2021 fourth quarter from the ERC. The credit now applies only to wages paid after March 1, 2020 and before October 1, 2021.

There are still tax planning opportunities, even with this recent change. Speak with your CPA or tax advisor today to discuss eligibility, calculations, how PPP plays into the ERC figures, and amended payroll returns that can still be filed.

Webinar Recording

On November 10, 2021, associate partner Ren Cicalese III, CPA, MST presented a webinar on the latest Employee Retention Tax Credit updates. Click here to access the recording. 

What are the basics of the ERC?

For 2020: 50% of qualified wages up to $10,000 qualified wages per employee for all quarters ($5,000/EE for all of 2020). Business qualifies if operations are fully or partially suspended as a result of a government ordered shutdown due to COVID-19, or gross receipts for the quarter have dropped by 50% compared to the same quarter in 2019.

For 2021: 70% of qualified wages up to $10,000 qualified wages per employee for any quarter ($7,000/EE for each 2021 quarter). If gross receipts in 2021 are 20% less than same quarter in 2019, you can qualify. Cannot use same wages for FFCRA Sick and Medical Leave Credits

• Cannot use the same wages for Paycheck Protection Program forgiveness
• Must reduce payroll expense by credit income tax return
• Related party wages are not eligible
• Paid after March 12, 2020 and before October 1, 2021
• Wages must be subject to FICA (pre-tax deductions don’t count)
• Wages paid to owners do not qualify for ERC (Those who own more than 50% of the business plus qualifying relatives)
• Qualified wages depend on numbers of full-time employees (FTE) (FTE is an employee who in 2019 averaged 30 hours/week or 130 hours/month)
  • Small Employers – Averaged 100 or fewer FTEs in 2019
  • Large Employers – Averaged more than 500 FTEs in 2019

Recovery Startup and Severely Financially Distressed Businesses

A late 2021 changes to the ERC was added eligibility for a recovery startup business. A recovery startup business is defined as an employer that began carrying on a trade or business after February 15, 2020 with average annual gross receipts under $1 million for 2020 and 2021. This business type is only eligible for Q3 of 2021 (no longer Q4 due to the infrastructure bill) and i capped out at $50,000 ERC per quarter.

Another update applies to businesses who are classified as severely financially distressed. This is defined as gross receipts for the calendar quarter are less than 10% of gross receipts for the same quarter in 2019 (or 2020 if the business didn’t exist in 2019). If a business is a severely financially distressed employer, use wages paid during the quarter regardless of if the employee worked or did not work (helps larger employers). Like the recovery startups, this only applies to Q3 2021.

I have more ERC questions…

See our previous article on Employee Retention Credit frequently asked questions. If you still need clarification on an issue, we invite you to email solutions@alloysilverstein.com for further assistance.