The Employee Retention Credit (“ERC”) was first created by the CARES Act in March of 2020, early in the pandemic. But just because pandemic restrictions have largely ended doesn’t mean that businesses cannot go back and claim the ERC! Here are some important points about the ERC that you might want to know as you consider filing for the credit:
While first created by the CARES Act in March of 2020, the ERC’s eligibility standards were amended by other Coronavirus legislation.
Even if you didn’t qualify in 2020, you might qualify for some part of 2021! Some changes from 2020 and 2021 include:
- In 2020, the ERC capped at $5,000 per employee for the entire year. In 2021, that was expanded to $7,000 per employee per quarter.
- A business that had too small of a decline in revenue under the 2020 standard may qualify under the 2021 standard. The “revenue test” required gross receipts in 2020 to be less than 50% of receipts for the same quarter in 2019. In 2021, the employer must show that receipts are less than 80% compared to the same quarter in 2019.
- The threshold to be a “small employer” for the ERC was easier to meet in 2021, allowing employers to establish qualified wages more easily than in 2020. In 2020, a small employer had 100 or fewer full-time employees. In 2021, a small employer had 500 or fewer full-time employees.
- You can learn more about the changes between 2020 and 2021 on the IRS website, where they have a comparison chart: https://www.irs.gov/newsroom/employee-retention-credit-2020-vs-2021-comparison-chart.
Whether you are a large or a small employer matter when it comes to determining what wages qualify for the ERC.
A large employer can only claim the credit for wages paid to employees while that employee is “not providing services.” A small employer can claim the credit for all wages during the period sufficiently affected by government restrictions.
Are you an employer that uses a third-party company to handle payroll, benefits administration, or payroll-related tax filings, such as your Form 941?
Don’t worry, you may still be able to file for the ERC even if you use a third party to handle your employment related taxes. However, some of these services are requesting that their clients obtain an opinion letter from an attorney or an accountant that certifies that the business is eligible for the ERC.
Did you start your business in 2020?
Amendments to the CARES Act created special qualification criteria for new businesses that is easier to meet than the normal eligibility standards, so long as the business is sufficiently small (less than $1 million in gross annual receipts) and meets other criteria.
These are a few of the things that a business should consider before claiming the ERC.
Remember that before you can start calculating how much of a credit you may claim, the first step is to determine whether your business is a “Qualified Employer” because your business operations were sufficiently affected by governmental orders related to Covid-19. Before claiming the ERC, you should carefully review the guidance provided by the IRS and consult with your accounting or legal professional.
If you have questions about the ERC or other business-law related matters, Clyde Snow is here to help! Check out our Business group for contacts to assist you.