The Employee Retention Credit (ERC) program was enacted March 27, 2020. Since then, the program has evolved a great deal. This evolution has led to the eligibility of many more small businesses, as well as the period of time the program runs extending through the end of 2021.
At Ceterus, we have worked diligently to get our customers and small businesses the information they need on the ERC program, as well as the many other programs that exist to help small businesses survive the pandemic.
As it relates to the ERC program, I wrote five blog posts that spoke only to that program. It is clearly very complex. It would be very easy for a small business owner to give up on trying to determine what programs they qualify for given the complexity and the vast amount of information you can find on each one. It can be overwhelming.
This blog post is going to help small business owners determine if they qualify for the ERC program. It will also arm small business owners with enough information to be able to have a productive conversation with their trusted financial advisor on the topic.
There is no need to be in a rush. There aren’t really any deadlines to worry about at this point. I do encourage small business owners to evaluate your unique situation and speak with someone knowledgeable on the topic. Don’t leave anything on the table. Let’s jump in.
Are you an eligible employer?
2020 – an employer that:
1. Had the operation of the trade or business carried on during calendar year 2020 fully or partially suspended due to orders from an appropriate governmental authority limited limiting commerce, travel or group meeting due to COVID-19, OR
a. The employer would be eligible for the ERC credits during the period of time where the business is fully or partially suspended
2. Had a significant decline in gross receipts gross receipts (any 2020 quarter that had gross receipts less than 50% of its gross receipts for the same quarter in 2019)
a. The employer would be eligible for the ERC credits in the quarter where their gross receipts were less than 50% of its gross receipts for the same quarter in 2019 plus the following quarter. Eligibility ends in the quarter after the employer has a quarter in which gross receipts were equal or greater than 80% of the same quarter in 2019. This one is a little complex. In previous blog posts I go into more detail on how this works. Check out more information here.
2021 – an employer that:
1. Had the operation of the trade or business fully or partially suspended due to orders from an appropriate governmental authority limited limiting commerce, travel or group meeting due to COVID-19, OR
a. The employer would be eligible for the ERC credits during the period of time where the business is fully or partially suspended
2. Had a reduction in gross receipts of at least 20% in a calendar quarter compared to the same calendar quarter in 2019 (you are able to use the immediately preceding quarter as well if necessary)
a. The employer would be eligible for the ERC credits in the quarter where they experienced a reduction of gross receipts of 20% or more compared to the same quarter in 2019. The credit ends when the test is no longer passed.
Note: An employer must determine eligibility based on all members of a controlled group on an aggregated basis.
Credit Amounts
Calendar Year 2020
An employer may qualify for the ERC credit beginning on March 13, 2020. The program ends December 31, 2020. Eligibility for the credit is determined on a quarterly basis. An employer may qualify for the credit in each of quarters 2, 3 and 4 of 2020. The dollar value of the credit is equal to 50% of the first $10,000 of qualified wages paid per employee. The maximum credit an employer will receive per employee for the year is $5,000.
Calendar Year 2021
An employer may qualify for the ERC credits for all of 2021. The credit is determined on a quarterly basis, so an employer may be eligible for Q1, Q2, Q3, and Q4. The dollar value of the credit is equal to 70% of the first $10,000 of qualified wages paid per employee, per quarter. The maximum credit an employer will receive per employee, per quarter in 2021 is $7,000, which equates to a maximum credit for the year of $28,000.
What is a qualified wage?
The answer is – It Depends! First you need to determine if you are a small employer or larger employer.
Small Employer
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2020 – Q2, Q3, and Q4 you averaged 100 or fewer full-time employees (defined as average of 30 hours per week or 130 hours per month)
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2021 – For 2019 you averaged 500 or fewer full-time employees
Large Employer
You exceed the full-time employee counts noted for small employers
Small Employer Qualified Wages
All wages paid to, and qualified health plan expenses paid for all employees.
Large Employer Qualified Wages
Wages paid to, and qualified health plan expenses paid for all employees that DID NOT perform services for the employer.
Note: Qualified health plan expenses include amounts paid or incurred by an employer to maintain a group health plan. This includes employer payments plus employer contributions made on a pre-tax basis.
I’m a new business – what about me?
Shoot, I opened my business in 2020. I see all these references telling me I need to compare gross receipts to 2019. That must mean I am not eligible. Not so fast! You may qualify for ERC credits as a Recovery Startup Business. Let’s see how that works.
Recovery Startup Business Eligibility
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The employer began carrying on a trade or business after February 15, 2020, AND
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The employer’s average annual gross receipts for up-to-three-year period before the applicate quarter did not exceed $1,000,000.
Credit Amounts
ERC credits for Recovery Startup Business are limited to Q3 and Q4 of 2021 (use 2021 rules noted above). The dollar value of the credit is limited to $50,000 per quarter.
The ERC program can be very helpful for small businesses navigating the pandemic. I strongly encourage you to reach out to your trusted advisor if you have any questions on if you may qualify for the program and if you do the maximum amount of credits, you may be eligible for. Below are links to resources the IRS has put out if you want to explore the program on your own.
Our team at Ceterus is standing by ready to help as well. Don’t hesitate to reach out to us if you need help related to ERC, PPP forgiveness, and of course any of your bookkeeping and financial reporting needs. Contact Ceterus.
IRS Links
