What Every Business Needs to Know About the Employee Retention Credit

Does Your Business Qualify for the Employee Retention Credit?

The Employee Retention Credit (ERC) is a refundable tax credit available to employers who were significantly impacted by COVID-19. The ERC was originally introduced under the CARES Act, but the Consolidated Appropriations Act signed on December 27, 2020 made some amendments to the it, most notably that Paycheck Protection Program loan recipients— for Round 1 or Round 2 loans—are now eligible to receive the credit. The ERC will offer a potentially significant tax savings opportunity for many businesses in 2020 and 2021. The ERC is a fully refundable payroll tax credit for employers up to a maximum of $5,000 for each employee in 2020 or $7,000 per employee per quarter in 2021.

To determine whether your business qualifies for the Employee Retention Credit, consider the following:

1. Did your business have a 50 percent reduction in gross receipts in any quarter in 2020 compared to the same quarter in 2019?
2. Was your business required to be partially or fully shut down under a state or local order at any time between March 12 and now?
3. Did your business have a 20 percent reduction in gross receipts in the 4th quarter of 2020 compared to the 4th quarter of 2019?
4. Do you anticipate that your Q1 2021 gross receipts will be 20 percent less than those in Q1 2019?
5. Do you anticipate that your Q2 2021 gross receipts will be 20 percent less than those in Q2 2019?

Kreischer Miller can assist you through the Employee Retention Credit process by:

• Conducting an analysis to establish whether your business qualifies for the credit.
• Determining how to calculate the credit.
• Navigating the interplay between the Employee Retention Credit and the Payroll Protection Program.

How significant could the ERC be for your business?

Many businesses aren’t aware of just how significant the Employee Retention Credit (the ERC) can be, or they may be concerned that there will be a great deal of work involved to take advantage of it. However, unlike the Paycheck Protection Program which grabbed much of the pandemic relief spotlight and was ultimately fraught with complexity and shifting requirements, the ERC is a fairly straightforward tax credit that does not require overly complicated paperwork or calculations.

A few important notes about the ERC:

• You can qualify for the ERC for 2020 or 2021, even if you have a PPP loan. While the original ERC rules dictated by the CARES Act prevented a company from taking advantage of both programs, last December’s legislation amended this ruling. There is some interplay between the two programs to be aware of, and your tax professional can provide more guidance.
• The ERC is different than the payroll tax deferral authorized under the CARES Act. There has been some confusion about whether the ERC is the same as the Social Security payroll tax deferral opportunity that received some attention last year. They are different programs; the ERC is a tax credit, while the payroll tax deferral was essentially an interest free loan designed to free up much-needed short-term cash for struggling businesses.
• When determining whether a decline in gross receipts will qualify for the ERC, you will use 2019 as your basis of comparison – whether you are evaluating 2020 or 2021. Because 2019 was the last full year not impacted by the pandemic, it offers the most reasonable way to determine how significantly your business was impacted in 2020 or 2021.

ERC Client Examples

Below are a few examples of various businesses we have recently helped take advantage of the ERC. We encourage you to reach out to learn more about how your business can potentially benefit from this tax credit. 

Manufacturer with 250 employees and received a first round PPP loan

• The company experienced a 20 percent reduction in Q4 2020 gross receipts compared to Q4 2019.
• This allowed Q1 2021 to qualify for the ERC under the new look-back provision, resulting in an expected credit of $1.4 million for Q1 2021.
• The company is also anticipating a 20 percent reduction in Q1 2021 gross receipts compared to Q1 2019. If this is the case, it would be eligible for an additional $1.4 million credit for Q2 2021.

Child and education facility with 100 employees and received first round PPP loans for multiple locations

• The company’s multiple locations were mandated to be shut down under the Pennsylvania state order from March 22 through June 1, 2020. Gross receipts declined by 50 percent during this time.
• As a result of the shut-downs and the decline in gross receipts, the business is eligible for the ERC from March 22 through December 31, 2020.
• We evaluated the interplay between the ERC and the company’s PPP Loan Forgiveness to maximize both programs. The result was a credit of $300,000 in 2020 and the business received full forgiveness on its PPP loans.

Specialty construction contractor with 400 employees and received a first round PPP loan

• Many of the company’s Pennsylvania worksites were mandated to be shut down from March 22 through May 1, 2020. Half of the workforce on these jobsites was furloughed, but the company continued to pay for their employees’ health insurance. Health insurance costs are considered qualified wages for the ERC.
• This is considered a partial shut-down for the purposes of the ERC.
• The company was eligible for a $100,000 credit in 2020.

General construction contractor with 125 employees

• The company experienced a 20 percent reduction in gross receipts for Q4 2020 compared to Q4 2019.
• This allowed Q1 2021 to qualify for the ERC, resulting in an expected credit of $800,000 for Q1 2021.
• The company is also anticipating a 20 percent reduction in Q1 2021 gross receipts compared to Q1 2019. If this is the case, it would be eligible for an additional $800,000 credit for Q2 2021.

Law firm with 20 employees

• The company experienced a 20 percent reduction in gross receipts for Q4 2020 compared to Q4 2019.
• This allowed Q1 2021 to qualify for the ERC, resulting in an expected credit of $150,000.
• Even though the company has a relatively small number of employees, it qualified for a significant credit because the average quarterly wage of its employees is more than $10,000.