The Employee Retention Credit was created under the CARES Act in 2020 to encourage businesses to keep their employees on their payroll. Since its enactment, the ERC has been expanded and extended for 2021. For wages paid in 2020, qualified employers can receive 50% of up to $10,000 in wages paid per employee. For wages paid in 2021, the credit increases to 70%. You may be wondering, “how does a business qualify for the employee retention credit?”
How to Qualify for the Employee Retention Credit
There are three ways an employer can qualify for the employee retention credit.
1. Significant Decline in Revenue
The first way an employer can qualify for the employee retention credit is to have seen a significant decline in revenue for any eligible quarter in 2020 or 2021. For 2020 the revenue decline must be 50% as compared to revenue for the same quarter in 2019. For 2021 the revenue decline must be 20% for any quarter as compared to the same quarter in 2019.
2. Suspension of Business
Another way an employer can qualify for the ERC is if their business was fully or partially suspended by government order due to COVID-19 during any of the calendar quarters in 2020 and 2021. The suspension needs to be a federal, state, or local order that limits business, travel, or group meetings due to Covid-19. The employer must have been more than nominally impacted by the order, and not able to continue operations through telework.
3. Eligibility for Recovery Startup Businesses
There is a separate set of criteria that a recovery startup business (RSB) must meet to qualify for the employee retention credit. The criteria are as follows; all points must be met:
- The entity began carrying on a trade or business after February 15, 2020.
- The business’s average annual gross receipts for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the ERC is determined do not exceed $1,000,000.
- The RSB is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts.
- In the case of an eligible employer that is an RSB, the amount of the credit allowed for any calendar quarter shall not exceed $50,000. The credit for RSBs may be claimed for wages paid after June 30, 2021, and before January 1, 2022.
Employers must only meet one of these three qualifications to be eligible for the Employee Retention Credit.
Calculation of Qualifying Wages
If the employer is eligible, the qualified wages dollar amount is determined by whether an employer had, on average, more or less than 100 employees in 2019.
Less Than 100 Employees
If the employer’s average number of employees throughout 2019 was 100 or fewer, the credit is calculated based on wages paid to all employees whether they worked or not during any of the eligible calendar quarters in 2020 and 2021. Therefore, even if all their employees worked full-time throughout the pandemic, the employer still receives the credit.
Greater Than 100 Employees
If the employer’s average number of employees throughout 2019 was greater than 100, then the credit is only allowed for wages paid to employees who did not work during any of the eligible calendar quarters in 2020 and 2021.
In both cases, “wages” includes not just cash payments but also a portion of the cost of employer-provided health care.
Initial Information Needed to Determine Qualification
If you believe your business may qualify for the Employee Retention Credit, you may want to review the following information with an accountant.
- Summary of quarterly revenue
- Quarterly payroll tax returns
- Detail of wages paid by date, by employee
- Detail of wages used for Paycheck Protection Program (if applicable)
Please be wary of taking aggressive ERC positions. If you think you may qualify, please don’t hesitate to reach out to your dedicated accountant so that we can analyze your situation for you.