The Paycheck Protection Program (PPP) is the one that receives the majority of the attention when it comes to small business relief. However, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 also created the Employee Retention Credit (ERC), which offered eligible employers a refund on their federal payroll expenses for the year 2020, such as their Social Security and Medicare taxes.
Concerns About Going Back to Work? You’re Not Alone.
The PPP and the ERC have the same overarching objective, which is to provide an incentive for employers to continue paying their employees despite the Covid-related shutdowns and limitations. Because the ERC benefits were set at $5,000 per employee for Q2, Q3, and Q4 of 2020 in aggregate, which for the vast majority of businesses was a far lower amount than they could get under PPP, very few companies employed it.
The Taxpayer Certainty and Disaster Tax Relief Act (part of the Consolidated Appropriations Act, 2021), which was enacted on December 27, 2020, and the recently enacted American Rescue Plan (ARP), which expanded the ERC through the end of 2021 and increased the refundable and advanceable credit to $7,000 per employee for two quarters each or up to ,000, respectively, have both been passed into law. The guidance provided by the Internal Revenue Service provides a more in-depth explanation of these changes.
ERC and PPP are now available to businesses.
The primary problem with the Employee Retention Credit in 2020 was that companies who had previously applied for and been awarded PPP money were unable to benefit from both programs at the same time. The majority of companies found that PPP was not only simpler to use but also provided more relief. The PPP was determined by multiplying the monthly payroll in 2019 by 2.5 and placing a limit on the highest compensation at $100,000, which resulted in an upper limit of $20,800 for each employee. On the other hand, ERC was limited to a maximum of $5,000 per employee.
Recent law provided a solution to this problem by enabling employers to benefit from ERC and PPP benefits simultaneously beginning in 2021. The only stipulation is that monies from both programs cannot be utilized during the same payroll period; to put it another way, there is “no double dipping.” This should not be an issue because of the forgiving rules that are associated with PPP. Businesses have the option of choose their own covered period, which can range from eight to twenty-four weeks, during which time they can use their PPP money on payroll and other eligible expenditures without jeopardizing their ability to get forgiveness. The ERC is available for usage by businesses throughout a variety of time periods.
Employers have the option to “look back” to the year 2020 in order to make a retroactive claim for the ERC. To be more specific, employers that were given a PPP and, as a result, did not submit an ERC claim are now able to do so for the year 2020. Employers are have to submit revised tax returns for each appropriate quarter of 2020 in order to be eligible to claim the ERC in 2020.
Who can apply for a seat in the ERC?
In a press statement from the IRS dated January 26, 2021, the agency advised business employers to take advantage of the ERC and provided the following summary of qualifying requirements:
Employers will be eligible for the program beginning January 1, 2021 if they meet one of the following criteria and conduct a trade or business between January 1, 2021 and June 30, 2021, and any of the following conditions:
- A complete or partial cessation of the operation of their trade or business during this period as a result of orders issued by the government restricting commerce, travel, or group gatherings owing to the presence of Covid-19, or 2.
- A decrease in gross receipts during a calendar quarter in the year 2021, such that the gross receipts of that calendar quarter are less than 80 percent of the gross receipts during the same calendar quarter in the year 2019. (The decrease in gross receipts has to be less than fifty percent for the business to be eligible in the year 2020.)
Employers had the ability, for the year 2020, to calculate the amount of ERC over Q2, Q3, and Q4 by deducting up to 50 percent of the first $10,000 of Qualified Wages paid per employee in the aggregate over all three quarters for a total of $5,000 per employee. This allowed for the deductibility of the ERC. For the year 2021, employers will compute the amount of ERC over the course of two quarters by removing 70 percent of the first $10,000 of Qualified Wages paid to each employee over the course of each quarter, for a grand total of $14,000 for each employee.
Different criteria are used to determine what constitutes “Qualified Wages” for small and large employers respectively. This pertains to salaries paid out by small employers as well as payments made into a qualified health plan for each applicable quarter. For big employers, this only covers compensation and payments into a Qualified Health Plan during the times when employees were unable to execute services owing to limits imposed by Covid or a drop in gross receipts. For the year 2020, small employers are defined as those that had an average of less than 100 employees in 2019, and for the year 2021, that number was increased to those that had an average of fewer than 500 employees in 2019.
How can you make your claim for the ERC?
The ERC is not only advanceable but also refundable, which means that employers can submit an application to the IRS to get an advance payment against payroll expenditures in the first two quarters of 2021. This only pertains to employers with less than 50 employees, and the appropriate form for them to fill out is 7200, which is an Advance of Employer Credits Due to COVID-19.
Employers can reduce their employment tax deposits in accordance with the laws and have access to the ERC for the first and second quarters of 2021 before they are required to file their employment tax returns for those quarters. The majority of payroll service providers are able to offer assistance with the necessary decrease.
Credit for Employee Retention: Considering the Future
While Covid-19’s influence on the economy is still being felt, the ERC presents a wonderful possibility for further offsetting the costs incurred by employees. On the other hand, the program is plagued by delays and bureaucracy, which may slow down the rate at which employers may gain access to funding. At this point, it will take many months to claim the credit retroactively for the year 2020. Numerous business organizations, such as the United States Chamber of Commerce and the American Institute of Certified Public Accountants, have already begun lobbying the Treasury Department to speed up the process.
Congress is now working on a bill that would move the PPP application deadline from March 31, 2021 to May 31, 2021. This will provide businesses extra time to submit their applications. As is customary, more alterations to the regulatory framework governing the PPP program are anticipated. In the interim, regardless of whether you intend to file for a first or second draw PPP, you should discuss the possibility of utilizing the ERC to obtain further relief with your accountant.