The Employee Retention Credit (ERC) was originally enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act – and further extended through the Infrastructure Investment and Jobs Act – to provide relief to employers that were negatively impacted by COVID-19 through the loss of gross revenue or through full or partial suspension of operations by a governmental order. The ERC provides employers a refundable credit for qualified wages paid to employees if the employer meets certain qualifications (see “Qualifications”). For businesses that existed prior to February 15, 2020, the opportunity is available for the 2nd Quarter of 2020 through the 3rd Quarter of 2021. For new businesses that started after February 15, 2020, the opportunity extends through December 31, 2021. The ERC can be claimed by filing Form 941X for qualifying quarters up to three years from the original filing of the Form 941.
The ERC is calculated by multiplying qualified wages (after the limitation) by 50% for 2020 and 70% for 2021 (wages for certain family members and “greater than 50% owners” do not qualify). In 2020, qualified wages are limited to $10,000 per employee annually. In 2021, qualified wages are limited to $10,000 per employee quarterly. Shown below is the maximum potential ERC credit per year:
- 2020: $5,000 credit per employee annually
- 2021: $7,000 credit per employee quarterly ($21,000 per employee annually)
Employers may qualify for the ERC if they meet either of the following criteria:
- Gross Receipts Test: The employer had a decrease in gross receipts in a calendar quarter compared to the corresponding 2019 quarter
- In 2020, a calendar quarter would need to have a more than 50% decrease in gross receipts compared to the corresponding quarter in 2019 to start the qualifying period. The qualifying period ends in the calendar quarter where, compared to 2019, the gross receipts were more than 80% of the corresponding quarter in 2019.
- In 2021, a calendar quarter would need to have a 20% or greater decrease in gross receipts compared to the corresponding quarter in 2019 to qualify. Note: There is a special provision in 2021 that allows a quarter in 2021 to qualify if the prior quarter had a 20% or greater decrease in gross receipts.
- Government-suspended operations: A nominal portion of operations were limited by a governmental order, including a reduction in the ability to provide goods and/or services due to a supplier being shutdown by governmental order.
Recovery Start-up Business
This provision of the ERC allows for a startup employer to qualify for the ERC even if it does not meet the criteria for the gross receipts test or was limited by governmental order. If an employer qualifies as a recovery startup business, they will be eligible for a credit up to $50,000 per quarter for qualified wages paid to employee. To qualify, an employer must meet the following criteria:
- Began carrying on any trade or business after February 15, 2020
- Has no more than $1,000,000 in average annual gross receipts over the prior three years ending with the preceding tax year of the calendar quarter in question
- For quarter 3 of 2021 only, the business cannot be eligible for ERC under the other ERC requirements (a decline in gross receipts or shutdown).
This is a brief summary of the ERC regulations and not meant to be a comprehensive list of requirements. If you believe your business may qualify for the ERC, or you’d like additional information about the ERC, please contact Holsinger, P.C.