Employee Retention Credit ERC Your Business Qualifies

The Employee Retention Credit (ERC) has some changes for 2021 and your business probably qualifies – even if you didn’t previously qualify for the ERC under the 2020 guidelines. The recently enacted Employee Retention Credit (ERC) provides additional support to businesses affected by the COVID-19 pandemic. Your business may qualify to take it retroactively and currently, even if you received a Payment Protection Program (PPP) loan.

A part of the Taxpayer Certainty and Disaster Tax Relief Act passed on December 27, 2020, the ERC provides qualifying businesses a refundable tax credit against employer Social Security tax paid on employee wages. The guidelines have changed for 2021. Your business probably qualifies to take the ERC, even if you did not apply for the ERC in 2020 and even if you received a PPP loan. Read further to learn how your business qualifies for the ERC, how to calculate it, and how to claim it. [Scroll to the bottom for the Infographic]

1. Your Business Qualifies for the ERC

The CARES Act enacted in March 2020 provided a refundable tax credit against employer-paid Social Security taxes to businesses affected by COVID-19, but only if the business did not also receive a PPP loan. That restriction has been removed by the Taxpayer Certainty and Disaster Tax Relief Act enacted on December 27, 2020. Thus, receiving a PPP loan is no longer a restriction and your business can take the ERC both for wages paid from March 12, 2020 through December 31, 2020 and for January 1, 2021 through June 30, 2021 (as long as one of the other qualifications described below applies).

  • For the period March 12 – December 31, 2020 your business qualifies if your business experienced a full or partial shutdown from a government authority ORyour business experienced a 50% decline in gross revenue.
  • For the period January 1 – June 30, 2021 your business qualifies if your business experiences a full or partial shutdown from a government authority OR your business experiences a 20% decline in gross revenue.

COVID-19 posed and still poses severe challenges for everyone. Government mandated shutdowns result in businesses not being able to provide work for some or all of their employees. Shutdowns create many obstacles and hardships for employees and their families. But during a full or partial government shutdown, if your business continued to pay wages to any number of your employees, whether or not they were able to conduct actual work for your business, your business qualifies for the ERC. 

If your business did not experience any full or partial government shutdown, you still qualify for the ERC if your gross revenue declined (in 2020) or declines (in 2021) in the percentages stated above.

The 2020 version of the ERC prevented businesses that received a PPP loan from receiving the ERC. But the PPP loan restriction was removed from the Taxpayer Certainty and Disaster Tax Relief Act signed on December 27, 2020. So, to reiterate, it does not matter if you already received a PPP loan in 2020 or if you will receive a PPP loan in 2021. Your business qualifies for the ERC with the conditions stated above around government shutdowns and/or decline in gross revenues.

Given the above, it seems extremely likely that most small to medium sized businesses in the United States qualify for the ERC. If your business did not already claim the ERC for 2020 wages paid, you may still do so now.

2. What Type of Employee Wages Qualify

Once you have determined that your business does indeed qualify for the ERC (number 1 above), here is how to figure out what employee wages may be counted.

Under 2020 guidelines, the size of your business’s workforce determines which employee wages are eligible for the ERC. For businesses with 100 or fewer employees, ALL of the wages for ALL of the paid employees can be used to calculate the ERC. It doesn’t matter whether or not your employees were conducting actual work for your business. If you paid wages to your employees while they stayed at home until your business was able to provide work for them, if you paid wages to employees who had to work remotely, and/or if you paid wages to employees that were able to come to your place of business to work – ALL of their wages may be included in figuring out the amount of your business ERC.

Under 2020 guidelines, for businesses with more than 100 employees, ONLY the wages you paid to them while they were unable to provide any work service for you may be used to determine the ERC. So, only the wages your business paid to employees that had to stay at home until you were able to provide work for them may be counted for the ERC. Wages paid for remote work do not qualify.

Under the new 2021 guidelines, businesses with 500 or fewer employees are eligible for the ERC and ALL of the wages for ALL of the paid employees can be used to calculate the ERC. Once again, it doesn’t matter whether or not your employees were conducting actual work for your business. If you paid wages to your employees while they stayed at home until your business was able to provide work for them, if you paid wages to employees who had to work remotely, and/or if you paid wages to employees that were able to come to your place of business to work – ALL of their wages may be included in figuring out the amount of your business ERC.

Plus, the ERC amount can be increased by a proportionate share of any employer health care costs related to your employee wages.

3. What Portion of Employee Wages Qualify

Given that your business does indeed qualify for the ERC (number 1 above) and based on the size of your workforce that determines the type of employee wages that qualify for the ERC (number 2 above), here is how to calculate the amount of ERC your business may claim.

For payrolls between March 12 – December 31, 2020, use 50% of the wages paid to EACH employee up to a maximum of $10,000 in wages paid to EACH employee DURING THIS TIMEFRAME.

For payrolls between January 1 – June 30, 2021, use 70% of the wages paid to EACH employee, up to a maximum of $7,000 in wages for EACH employee for EACH quarter.

4. How to Claim the ERC

To claim the ERC for the 2020 employer Social Security taxes on employee wages, the IRS suggests your business file Form 941-X, to amend your 2020 filings. For 2021 wages, the IRS suggests using Form 7200 before filing the regular quarterly Form 941 to indicate the amount of the ERC you will be claiming. Then file the quarterly Form 941 as usual. As always, it’s a good practice to talk with your accountant for advice in filing and claiming the ERC correctly for your business.

For further information on the ERC for 2021, see IRS News Release IR-2021-21, January 26, 2021

For IRS instructions and forms to amend your 2020 filings, see IRS Forms & Publications

For IRS instructions and forms for Form 7200 see About Form 7200

For CRI Payroll Services Clients

Please advise us of any Forms 7200 that you submit to the IRS so we can notify ADP to update your file with your correct information. Failure to notify would result in an IRS advance payment AND application of the same credit by ADP, which would result in underpayments of tax, and significant IRS penalties and interest. Our mission is to help your business stay compliant, so it is imperative that you alert us to any Forms 7200 that you submit as soon as you can.

For an in-depth look at the ERC, read more from our partners at ADP: Guidance on How to claim the Employee Retention Credit

The information provided here is for general information purposes only and should not be considered as tax or legal advice. We encourage you to consult with appropriate legal and tax advisors. This information is provided in good faith, however regulations are subject to change. We make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of this information.

Infographic-Employee Retention Credit
Infographic-Employee Retention Credit