Is Your Business Eligible for the Employee Retention Credit?

Although the pandemic is officially over, we're still experiencing some of its aftereffects—one of which is the employee retention credit, or ERC, included in the CARES Act of 2020.

The ERC has been modified several times in subsequent legislative enactments, making it a challenge to determine eligibility and calculate an accurate credit. It's worth the time to consider your company's eligibility and possibly amend prior tax returns because claiming the ERC could be significant.

ERC tax credits

The ERC provides cash to eligible employers as a refundable employment tax credit. From March 13, 2020, to December 31, 2020, 50% of qualified wages—including qualified health plan costs—can be paid to each employee, with a $10,000 maximum in qualified wages. The maximum credit is $5,000 per employee. From January 1, 2021, to September 30, 2021, 70% of qualified wages—including qualified health plan costs—can be paid to each employee, with a $10,000 maximum in qualified wages. The maximum credit is $7,000 per quarter or $21,000 per employee for 2021, as expanded and adjusted by the Consolidated Appropriations Act, American Rescue Plan and Infrastructure Investment and Jobs Act.

Eligible businesses

To be eligible, your business must have been fully or partially suspended by government orders or experienced a significant decline in gross receipts compared to the same quarter of 2019 of either 50% or greater decline in 2020 or 20% or greater decline in 2021.

It's important to note the option that your business was fully or partially suspended by government orders. This means your business didn't have to have suffered an actual decline in revenues. It may have even thrived, but at some point in time it needed to cease some operations or partly stop some services due to a mandate from an appropriate government authority. For example, a dentist who stopped providing cosmetic and elective procedures per government order and only operated to perform necessary dental work would qualify. As this example shows, essential businesses also qualify for the credit.

Employers who received Paycheck Protection Program, or PPP, loans are eligible for the ERC for both years but can't qualify wages paid with forgiven PPP loan proceeds. You can take advantage of both programs. Tax-exempt, medical and education employers as well as public colleges and universities may also be eligible employers.

The American Rescue Plan added two additional types of employers.

• Recovery startup businesses: These are companies that started after February 15, 2020, and had less than $1 million in annual gross receipts.
• Severely financially distressed employers: These are companies with gross receipts that were less than 10% of their gross receipts for the same quarter in 2019.

Qualified wages

The definition of qualified wages depends on the size of the employer and is based on each company's 2019 average headcount of full-time employees. The definition of a large or small employer is different for 2020 than for 2021. Small employers are defined as less than 100 full-time employees in 2020 and less than 500 in 2021. For small employers, qualified wages are equal to all wages and qualified health plan costs.

Large employers are defined as 100 or more full-time employees in 2020 and 500 or more in 2021. For large employers, qualified wages are equal to non-service wages and an allotted portion of qualified health plan costs.

There are some limitations on qualified wages, including a 30-day lookback rule for large employers in 2020. Owners and related individuals may not be included in the calculation, nor any wages for which FICA taxes weren't paid. Some additional limitations also apply.

The size of the employer is, however, only important for the definition of qualified wages. It has no relation to eligibility.

Check your eligibility

ERC eligibility and rules are covered by no less than five separate acts of Congress over a 22-month time period, including the CARES Act, Consolidated Appropriations Act, American Rescue Plan, Infrastructure Investment and Jobs Act and ERTC Reinstatement Act. Therefore, the ability to claim the credit has become muddled and confused, with many business owners thinking it didn't apply to them or that they were ineligible.

Talk to a trusted First Citizens representative to see if your company could be eligible for the credit and whether it's favorable for your accountant to seek an amendment to your company's prior tax returns. We're here to alert you to possible missed opportunities like this so you can have peace of mind knowing that you're getting the best financial advice possible.