The “Employee Retention Credit,” often known as the “ERC,” will continue to provide a wide variety of employers with attractive refundable payroll tax credits in the years 2020 and 2021 for salaries that qualify as being paid to qualifying employees. There is still time for businesses to submit an application for the ERC by submitting an updated Form 941X (Quarterly Federal Payroll Tax Return) for each of the quarters in which the company qualified as an Eligible Employer.
Since the ERC was first made available two years ago, our company has been able to assist hundreds of employers in obtaining the credit. According to Martin Karamon, a principal at Cherry Bekaert who also serves as the leader of the firm’s ERC Team, “We have not observed a slowdown in application approvals by the IRS.”
Karamon continues, “Even though employers can only assess their Eligible Employer status from March 13, 2020 through September 30, 2021, we are witnessing record numbers of our customers being eligible to receive the ERC.” “Unfortunately, a large number of companies have not as of yet determined whether or not they are eligible for the four different credits.”
Karamon and his staff have responded to the questions that have been asked the most frequently regarding this payroll tax credit as we approach the two-year anniversary of the ERC’s availability.
Employers who endured decreased sales or incurred interruptions to their businesses as a result of government-imposed limitations between the years 2020 and 2021 are eligible for an incentive known as the employee retention credit (abbreviated as “ERC”). Businesses and some not-for-profit organizations that continued to pay their employees despite the obstacles posed by the COVID-19 outbreak are still eligible for the ERC, and a large number of beneficiaries are already getting cash refunds.
Martin Karamon, the leader of the ERC team at the Firm, offers advice on how to choose an ERC service provider and describes the ways in which the provision of these services may differ between CPA firms and boutique agencies. Brooks and Sarah follow up with questions on ERC eligibility in a variety of businesses, differences between claiming credits in 2020 and 2021, and the future of the ERC in 2022 and beyond.
How exactly does one go about claiming their Employee Retention Credit?
The ERC is a refundable payroll tax credit that provides a maximum benefit of $5,000 per employee in the year 2020 and a maximum benefit of $21,000 per employee in the year 2021.
Who is eligible to get the Credit for Employee Retention?
Employers that went through a partial shutdown as a result of government orders limiting commerce, travel, or group meetings are eligible to participate in this program. Additionally, employers that went through significant declines in quarterly gross receipts (as compared to their quarterly gross receipts in 2019) as a result of the pandemic are also eligible to participate.
What exactly are qualifying salaries for the ERC?
The amount of ERC credits that can be claimed is determined by the amount of qualifying wages that was paid to employees when the business was in the eligible employer status. The refundable tax credits are typically substantially in excess of the payroll taxes that the companies are required to pay as a result of their participation in this program by the vast majority of employers. The amounts of financing a company may have gotten via PPP may not compare to the benefits that might be obtained from ERC.
Are there any differences in the advantages that large and small employers receive from the Employee Retention Credit?
The ERC regime provides supplemental benefits that are specifically tailored for smaller employers. To be more specific, during the time that they qualify as an Eligible Employer, they are permitted to include the salaries provided to all of their employees. Large employers are only allowed to count pay paid to employees for work that does not include delivering services.
For the purposes of the Employee Retention Credits, how do I determine if an employer falls into the category of a big or small employer?
- A “small employer” for the purposes of the ERC in 2020 is defined as an employer that has an average of one hundred or fewer full-time employees in the preceding year (2019 data).
A employer is considered to be a small employer for the purposes of the ERCs in 2021 if it has 500 or fewer full-time employees (as assessed in 2019).
The term “full-time employee” refers to an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (the monthly equivalent of at least 30 hours of service per week is considered to be 130 hours of service in a month), as determined in accordance with section 4980H of the Code. Full-time employees are eligible for benefits such as paid time off, paid vacation, and paid sick leave. The number of full-time employees for an employer that was in business during the entirety of the calendar year 2019 is calculated by adding up the total number of full-time employees for each month of that year’s calendar, then dividing that total by the total number of months in the year 2019. Those who did not do business for the year of 2019 are subject to additional regulations.
Is the Employee Retention Credit reserved just for those working full-time employees?
However, an employer is not prohibited from including in the salaries paid to both full-time and part-time employees when calculating the ERC. The only restriction that applies to the calculation of the credits is that an employer can only apply them to the first $10,000 of wages and health plan costs that are paid to each employee during each credit-generating period. This is the only limitation that applies to the calculation of the credits.
What are the eligibility requirements and the credit-generating periods for the ERC?
Employers who meet the requirements can submit an ERC claim for qualifying salaries received in 2020, as well as the first, second, and third quarters of 2021.
I’m interested in applying for the Employee Retention Credit; is it too late?
Yes. The date of April 15, 2024 is when the statute of limitations for the 2020 ERC will be completely exhausted. The period during which the 2021 ERCs are protected by the statute of limitations will not end until April 15th, 2025.
How do the salaries that are used in the R&D credit calculations and the wages that are used in the ERC calculations interact with one another?
- Wage expenditures that were used in the calculation for the ERC are ineligible for inclusion in the calculation for the R&D Credit.
- Wage expenses that qualify as both ERC-eligible Qualifying Wages and Qualified Research Expenses for the purposes of the R&D Credit still need to be included as QREs in the base year calculations for future year R&D Credit calculations. This is because ERC-eligible Qualifying Wages and Qualified Research Expenses are two different types of expenses.
- Wages supported through PPP are eligible to be included in the computation for the R&D credit.
To determine whether or not they are eligible for ERC purposes, the majority of companies likely use either the Government Mandate Test or the Gross Receipts Test.
The vast majority of companies are now meeting the requirements to qualify as an eligible employer for the ERC in 2020. The majority of businesses are currently meeting the requirements to become qualified employers in accordance with the Gross Receipts Test for the 2021 ERCs.
What exactly does ERC mean when it refers to “Gross Receipts”?
For taxed entities:
- Total sales (after accounting for returns and allowances), as well as any and all money received for services.
- Comprises all income earned through investments:
- Dividends
- Interest
- Rents
- Royalties and annuities, regardless of whether or not such amounts are earned in the regular course of the taxpayer’s trade or business.
- Decreased by the taxpayer’s adjusted basis in certain properties utilized in a business or trade, as well as the taxpayer’s gain on the sale of capital assets
- The tax accounting technique for recognizing income is taken into consideration.
For non-taxable entities:
- Gross Receipts refers to the total amount of money brought in during the taxable year and often includes all money received.
- The tax accounting technique for recognizing income is taken into consideration.
- Takes into account earnings from investments as well as grants.
- Does not take into account the taxpayer’s adjusted basis in certain properties utilized in a trade or business or in capital assets that are sold
If I meet the requirements of the Government Mandate Test, does it mean that I am immediately qualified as an eligible employer for the remainder of the quarter?
In a strict sense, yes; but, you may only pay salaries that qualify as such while the mandates are in place and they are having an effect on the business that is more significant than merely nominal.
When I receive the ERC, do I factor it into my yearly income?
No. Instead, the employer is responsible for reducing pay deductions on their income tax return for the tax year in which they qualify as an eligible employer for the purposes of the ERC.
Should I expect to make a payment toward the Employee Retention Credit?
No, the Employee Retention Credit is a tax credit that qualifying employers can claim against certain employment taxes in order to get a return of the entire amount of the credit. It is not a loan, thus there is no requirement for repayment of any kind. For the vast majority of taxpayers, the amount of the refundable credit is greater than the amount of payroll taxes paid during the period that generated the credit.
How can I submit my application to the ERC?
To apply for the ERC in the future, you will need to file an updated Form 941X (Quarterly Federal Payroll Tax Return) for each of the quarters in which the company qualified as an eligible employer. This will be the only method available.
How long does it take the Internal Revenue Service to provide a refund once an updated Form 941X has been submitted?
According to our previous dealings, it takes the Internal Revenue Service (IRS) roughly nine months to process a refund request once an updated Forms 941X has been submitted.
Could I qualify for both the ERC Loan and the PPP Loan?
Yes. Even if an employer is not allowed to use wages paid for with a PPP loan as part of the ERC calculation, PPP funds can only be applied to eight to ten weeks’ worth of salary costs. The eligibility periods for the ERC are much longer. PPP loans can also be used to pay costs that are not related to wages.
It is of the utmost importance, with regard to the ERC’s objectives, to prepare work papers that allot the PPP funds for the entirety of the 24 week Covered Period.
PPP money can be allotted to salaries that do not qualify for ERC generation (for example, earnings paid to owners of the company or wages that are in excess of $10,000 during any one of the four ERC credit-generating periods).
Do I have to file an application for PPP forgiveness before I can file an application for the ERC?
No, however you should try to allot the greatest permissible amount of non-wage expenditures to the PPP that is being forgiven if at all feasible.
Does ERC’s forgiveness of PPPs count against the company’s total receipts?
According to the safe harbor guidance issued by the Internal Revenue Service in August 2021, it has been established that the forgiveness of PPP obligations does not result in an increase in gross revenues equal to the amount of the liability relief (this also applies to Shuttered Venue Grant proceeds and Restaurant Revitalization Funding).
Are churches of worship and other types of religious groups eligible for ERC?
Yes. Churches and other religious organizations that have been negatively impacted by government-ordered capacity limitations on gatherings or that have seen significant losses in gross earnings are eligible to apply for the Employee Retention Credit.
When evaluating whether or not an employee is an eligible employer, is it necessary to combine the gross receipts of the company and the number of companies it has into a single figure?
No, in most cases. Because the Fund that owns the portfolio companies is not an active trade or business, brother-sister portfolio companies that fall under the fund have a good chance of being able to be considered as independent trades or businesses when it comes to determining qualified employer status (rather a passive investment vehicle).
Who is eligible for the ERC?
The ERC is open to a diverse variety of employers, including businesses operating in the following sectors of the economy:
- Education
- Those Who Do Business With The Government
- Medical Care and Biological Research
- Accommodation and Merchandising
- Industrial
- Not-For-Profit
- Services of a Professional Nature
- Real Estate and the Building Industry
- Technology
Can I still claim for the ERC even if I utilize a professional employer organization (PEO) rather than a conventional payroll tax provider?
Yes. Employers who make use of a PEO are still eligible to submit a claim for the Employee Retention Credit.
Visit the ERC Guidance Center at Cherry Bekaert or get in touch with a Martin Karamon if you would need further details on the Employee Retention Credit.
What are some instances of the consequences of COVID-19 rules that limit trade, travel, or group gatherings that allow a car dealership to qualify for the ERC?
See the Following Examples:
- Mandates for showroom closures: Take into consideration constraints on indoor capacity that influenced your ability to efficiently execute sales and marketing.
- Illustration A: A number of car dealerships in the state of Pennsylvania were ordered to reduce the amount of space available in their indoor showrooms until about the middle of the year 2021. The sales force was considerably disrupted, and routine activities were unable to be carried out.
- Example B: A dealership in Maryland often hosted outdoor marketing activities, which considerably increased both the dealership’s exposure and the number of customers that visited the establishment. Due to restrictions on the maximum capacity of the gatherings, this dealership was unable to host any events.
- In the years 2020 and 2021, there will be restrictions placed on travel as a result of geographic lockdowns:
- Here is an illustration: a dealership that was situated on an island and was cut off from the mainland. Between the months of March and May of 2020, there were no tourists allowed on the island.
- Disruptions in the supply chain as a result of requirements that influence shipping and manufacturing: This impacts dealerships that get components from companies that have been partially halted as a result of directives from the government.
- Illustration A: In the second and third quarters of 2021, the supply chain experienced difficulties as a result of port closures in China. Car dealerships that obtain their vehicles and auto components from these areas may be entitled for compensation for the duration of time that the ports were closed for business. The ports of Shanghai, Yantian, and Ningbo-Zhoushan are among those that have been impacted.
- Example B: In the years 2020 and 2021, the supply chain for autos was adversely impacted by indoor capacity limits, which had a significant negative impact on manufacturing hubs in Mexico.