The Employee Retention Credit was originally put in place under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March of 2020. The purpose of the credit was to encourage companies to keep employees on payroll during the pandemic. When it was originally rolled out, only companies who did not take Paycheck Protection Program loans were eligible. Because of this, many businesses chose to file for PPP loans in lieu of the credit. However, this changed when the Consolidated Appropriations Act was signed into law on December 27th, 2020. Businesses who took out PPP Loans can now qualify (retroactively) for the Employee Retention Credit (ERC).
There were also changes made to qualifications which may make access to these benefits easier. There are two ways to qualify for the credit. Business need only to meet ONE of these criteria.
- If, in any the last three quarters, the gross receipts were less than 50% of their gross revenues in that quarter in 2019. As of January 1st 2021, businesses only need to see a 20% drop in revenue within quarter one or two compared to the same quarter 2019.
- A trade or business that was fully or partially suspended due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter. Essential business that were able to remain open may still qualify if operations were disrupted due to shut downs. (PLEASE NOTE: Because the second test is subjective, it is important to review with a professional to determine eligibility.)
The impact of this credit could be significant for a company. The amount of ERC is equal to 50% of qualified wages and it is capped at $5,000 (annually) per employee. As of January 1st, 2021, that number is increased to $7,000 cap each quarter per employee. It is important to keep in mind that the ERC cannot be combined with previous PPP payments or R&D credits. Employers can claim this credit through Form 941.
While this may not apply to every business, it is worth exploring as it could provide benefit to companies that experienced losses due to the pandemic.