The Employee Retention Tax Credit – Could Every Small/Medium-Sized Business Benefit?
May 18, 2021
By Ben Aspir and Jeff Kelson
This article was originally published in NJBIZ.
The Employee Retention Credit (“ERC”) is now available to a broad cross section of businesses, with the potential for millions in savings on federal payroll taxes. The ERC is a fully refundable IRS payroll tax credit for employers. The ERC had been originally overshadowed by the Paycheck Protection Program (“PPP”) due to a prohibition on businesses from obtaining both the ERC and PPP funds. Retroactive to 2020, the recently passed Consolidated Appropriations Act, 2021 allowed businesses that received PPP funds to still qualify for the ERC.
The maximum payroll tax credit under the ERC program is:
- Tax year 2020: $5,000 per employee per annum (50% of the first $10,000 of eligible wages).
- Tax year 2021: $7,000 per employee per quarter, which translates into a maximum credit of $28,000 per employee for 2021 (70% of the first $10,000 of eligible wages per quarter, per employee; assuming a business qualifies for all 2021 quarters).
For example, if a small business with 50 employees is deemed eligible for all four quarters of 2021 it could potentially receive a $1,400,000 IRS payroll tax credit (50 employees x $28,000).
In order to qualify for the ERC, a business must experience either a government-mandated full/partial suspension of operations or a significant decline in gross receipts.
- Tax year 2020: a “significant decline” in gross receipts is if an employer’s gross receipts for a given quarter are less than 50% of their gross receipts for the same calendar quarter in 2019.
- Tax year 2021: a “significant decline” in gross receipts is if an employer’s gross receipts for a given quarter are less than 80% of their gross receipts for the same calendar quarter in 2019.
- For all 2021 quarters, an optional election is available which allows a lookback to the prior quarter if there hasn’t been a 20% decline in gross receipts. The election allows a lookback at gross receipts of the immediate preceding calendar quarter. For instance, for Q1 2021, a taxpayer can elect to use Q4 2020 and compare its gross receipts to Q4 2019.
Businesses of any size may potentially benefit from the ERC. However, there are limitations on the ERC for “large employers.” If a business is deemed to be a large employer it can only claim the ERC for wages paid to employees not to work or employer-paid health insurance premiums for furloughed employees. A large employer for purposes of the ERC is defined as:
- Tax year 2020: a business that had averaged more than 100 full-time monthly employees in
- Tax year 2021: a business that had averaged more than 500 full-time monthly employees in
If a business is not deemed to be a large employer it may potentially claim the credit for all eligible employees, whether working or not.
Interplay Between the ERC and PPP
Eligible businesses can claim the ERC on wages that are not used toward payroll costs when applying for PPP forgiveness. Businesses should analyze their payroll costs in order to obtain 100% PPP loan forgiveness and maximize their ERC. The PPP loan forgiveness program allows businesses to report up to 40% of qualified non-payroll costs (utilities, rent, etc.) on its application.
The ERC is claimed on IRS Form 941. An eligible business may reduce its federal employment tax deposits by the allowable ERC amount. If the ERC exceeds the remaining federal employment tax deposits for that quarter, the business may file Form 7200 to claim an advance refund. In order to claim the ERC for previously filed quarters a Form 941-X must be filed. A tax professional should be consulted to determine ERC eligibility.