Note: We are closely monitoring H.R. 3684, known as the Infrastructure Investment and Jobs Act. The Senate has approved the infrastructure bill and now goes to the House of Representatives for consideration as of the publication. The infrastructure bill would terminate the employee retention credit early, making wages paid after September 30, 2021, ineligible for the credit.
The Employee Retention Credit (ERC) was introduced in 2020 to help businesses that have been affected by the COVID-19 pandemic. Since its release, it has been expanded and modified to help more businesses. Despite all of this, many businesses that are eligible for the credit haven’t filed for it. Did the pandemic impact your business? Don’t assume your business is ineligible. Keep reading to learn more.
What is the Employee Retention Credit?
The ERC allows businesses to claim a refundable credit for qualified employee wages and related expenses if there was a significant disruption to business because of the pandemic. That disruption is measured in a quarterly reduction of gross revenues – 50% reduction in 2020 vs. 2019; and only 20% reduction in 2021 vs. 2019. In addition, there is a “safe harbor” test that allows you to look back a quarter. For example, if your 4th quarter 2020 revenues were down 20% compared to the 4th quarter 2019, you are eligible for the first quarter of 2021, regardless of the first quarter test outcome.
The second disruption is a government shutdown – complete or temporary. For example, a restaurant limited to 75% seating capacity by the governor’s mandate has experienced a partial shutdown.
If you experienced EITHER one of these disruptions, you might be eligible for the employee retention credit.
Eligibility for 2020 includes businesses with 100 or fewer full-time equivalent employees in 2019, in which all wages qualify whether the business was open or (partially) closed because of governmental orders. For businesses with more than 100 employees, only wages paid to employees when they weren’t providing services because the pandemic are eligible.
For 2021 the full-time equivalent threshold increased to 500 employees in 2019.
For 2020 the credit is 50% of the first $10,000 of eligible employees’ earnings for the year – up to $5,000 per employee for the year.
For 2021 the credit is 70% of the first $10,000 of eligible employee earnings per QUARTER – up to $28,000 per employee for the year.
What new guidance was released?
The IRS released Notice 2021-49 on August 4, 2021, which provided additional ERC guidance.
- The ERC was expanded to include wages paid through December 31, 2021.
- “Recovery startup businesses” launched after February 15, 2020, have been added to the definition of eligible businesses.
- Clarifying the definition of a full-time employee, including whether wages paid to full-time equivalents are considered eligible.
- Determining if tips should be considered qualified wages.
- Outlining whether wages paid to majority owners and their spouses are considered qualified.
Keep in mind, the ERC is a complex tax credit with ever-changing guidelines and requires interpretation. Reach out to our professional tax team, who are familiar with the credit and most up-to-date guidelines.
What if I missed filing for the ERC?
While some of the newer guidelines are retroactive, others only apply to wages paid more recently. In most cases, employers can file a correction to their quarterly tax documents to receive appropriate credit for qualified wages paid. Keep in mind that wages included in Payroll Protection Plan (PPP) forgiveness are not qualified (no double-dipping).
We have noted a longer processing time for amended returns. This means you’ll see benefits of the credit faster by filing for it with your quarterly returns; however, it could take 90 to 120 days for amended returns.
How can my business receive help?
If you’re like many businesses and need help understanding the ERC and the recent changes, reach out to our team of qualified professionals for help! We can help you:
- Determine if your business is eligible for the ERC moving forward and/or file an amended return.
- Understand which paid wages and expenses are eligible to be included in calculations.
- Assist in calculating the amount of credit your company is eligible to take.
- File amended or new returns in relation to your business.
We look forward to helping you!