11 Mar 2021 How to Calculate and Claim ERC
The Employee Retention Credit (ERC) was introduced in March 2020 as part of the CARES Act. The ERC is a refundable payroll tax credit against employee wages designed to make it easier for businesses that, despite challenges posed by COVID-19, choose to keep their employees on the payroll.
In late December, the Consolidated Appropriations Act (CAA) was signed into law and included adjustments to both the Paycheck Protection Program (PPP) and the ERC. Previously, a company could not use the ERC if it had taken out a PPP loan. The CAA reversed this, now allowing companies to apply for and receive a PPP loan, as well as utilize the ERC. However, there are important provisions for claiming this credit to be aware of.
We hope this article will inform and educate you regarding the requirements, rules, and calculations of the modified ERC. There is specific guidance, differing per year, for claiming this credit for wages paid not only in 2020 but also in 2021.
How do I qualify?
To qualify for the ERC in 2020, employers needed to meet one of two requirements. They may qualify if their business was fully or partially shut down by government order or they experienced a 50% or greater decrease in gross receipts during a calendar quarter in 2020 compared to 2019. The amount of credit available is 50% of wages paid, including health plan expenses, from March 13, 2020 to December 31, 2020. The credit will max out at $5,000 per employee (50% of 10,000) for 2020.
The requirements to meet eligibility for 2021 are like 2020; however more beneficial to employers. Gross receipts must have declined by only 20% or more in any quarter compared to the same quarter in 2019. Gross receipts are not compared to the same quarter in 2020. The credit for 2021 is 70% of wages paid up to $10,000 per quarter per employee. Currently, the credit is only available for the 1st and 2nd quarters of 2021.
What are considered “eligible wages?”
Eligible wages include wages and health plan expenses paid by the employer. Congress intended to help smaller businesses weather the pandemic, so there were employer size stipulations on eligible wages.
For 2020 wages paid, employers with 100 or fewer average monthly full-time employees during 2019 can claim a credit for all qualified wages paid to any employee during the 2020 quarters. Employers with more than 100 average monthly full-time employees during 2019 may only claim a credit for wages paid to employees NOT working during the time period. For example, employees who were temporarily furloughed due to the shutdown but kept on the company’s payroll. These wages are eligible for claiming the ERC.
For 2021 wages paid, employers with 500 or fewer average monthly full-time employees during 2019 can claim a credit for all qualified wages paid to any employee during the period, subject to $10,000 of maximum wages per employee, per quarter. Employers with more than 500 average monthly full-time employees during 2019 may only claim a credit for wages paid to employees NOT working during the time period.
How do I claim the credit?
The ERC is not an income tax credit, but a payroll tax credit. It is claimed on Form 941, Employer’s Quarterly Federal Tax Return. If the employer is an annual filer, they can claim it on Form 944. Since the 2020 941 or 944 payroll forms should have already been filed, the applicable reports would need to be amended to claim the credits.
For 2021, employers can utilize the ERC for the 1st and 2nd quarters of 2021. They can reduce their employment payroll tax deposits during the quarter by the amount of the ERC. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers with more than 500 employees.
The effects of a PPP loan and other payroll credits
While employers with PPP loans in 2020 can now go back and claim the credit, wages being utilized for PPP loan forgiveness are disallowed for the ERC calculation. Wages covered by other FFCRA credits (i.e., paid sick leave or paid family leave credits) are also not allowed for the ERC.
If an employer has already applied for PPP forgiveness, and only used qualified wages to qualify for forgiveness, it is unclear if employers can amend the forgiveness application to use other qualified expenses and decrease the qualified wages. Amending the forgiveness application would allow more wages to now be claimed for the ERC.
If employers have not applied for PPP forgiveness, they are in a perfect position to take advantage of the PPP forgiveness and utilize the ERC. This will require some planning to determine what wages to use for PPP, maximize ERC, and meet the requirements of both programs.
Conclusion
Many employers may find they are now eligible to claim the ERC. However, with the complexities of the credit calculation and PPP loan forgiveness, we encourage you to reach out to us for assistance in determining if you may qualify. We invite you to allow us to help calculate your maximum ERC while still obtaining forgiveness of your PPP loan.
Authored by Haynie & Company: Mary Hansen, CPA, Naoni, McCurdy, CPA, and Craig Lewis