The Employee Retention Credit (ERC — sometimes abbreviated ERTC) is available to hundreds of thousands of companies and nonprofits who were affected by the Covid-19 pandemic. It can seem simple at first: if you kept paying your employees during the pandemic, the government has your back. But figuring out whether you’re eligible, and how much you might receive, quickly gets complicated.
This “Nutshell Guide” to the ERC is meant to give you a sense of whether you might qualify. Every organization is different, of course, so companies like ours exist to work you through the process and obtain the credit to which you’re entitled. Beware of anyone who says that every business qualifies — that isn’t so, and if you don’t follow the IRS’s rules, you could face legal exposure. Okay, let’s get started.
1. Basic Threshold
The ERC is available to companies and nonprofits with W2 employees who were working during 2020 and/or 2021. That’s often the threshold question that we start with. No W2s, no ERC. Also, the W2 employees need to be not related to the business’s owner.
That being said, the ERC is available even if your company got PPP loans that were forgiven. Probably the #1 misconception we hear from clients is that they don’t think they qualify because they got a PPP loan. Not so! More on that below.
2. How to Qualify
There are three ways to qualify. A single company can qualify by one, two, or all three.
- Decline in Revenue, if 2020 or 2021 revenue is lower than the same quarter in 2019. For 2020, decline must be >50%. For 2021, >20%. If that is met, the entire quarter qualifies.
- Loss of capacity due to shutdown orders. This qualifies only for the duration of the shutdown order — see below.
- Recovery Startup Business. If a business was founded after February, 2020, it usually qualifies for Q3 and Q4 2021, no more questions asked. Note, though, that there is a $50,000 limit on recoveries as an RSB.
If your business was completely shut down, the period of the shutdown qualifies. But if there was what the IRS calls a “partial shutdown,” things can get complicated. There needs to be a >10% loss of ability to provide services due to rules like capacity limits, social distancing, etc (not masks). It’s also possible to recover if your suppliers were limited in this way, which happens often: say, if a distributor has Covid restrictions at a warehouse, and as a result you don’t get materials you need. We find that this portion of the qualification process requires a conversation to see what you experienced, and research into the shutdown rules of various locations. Fortunately, that’s what we do!
3. How Much Can Be Recovered?
The next step is calculating how much you can recover.
There is a maximum recovery of $10k in qualified wages per employee for 2020, and $10k per quarter for 2021. Only a percentage of that is recoverable: 50% ($5k max) for all of 2020, and 70% (7k max) in Q1, Q2, and Q3 of 2021. That’s why you often hear $26k per employee as the total recovery amount: $5k for 2020, $21k for 2021. So again:
- 2020: .5 of qualified wages up to 10k per year
- 2021 . 7 of qualified wages up to 10k per quarter
- Max of 26k per employee for the entire ERC program
Finally, there are some adjustments:
- Qualified wages exclude wages paid to the owner or the owner’s immediate family, as noted earlier.
- If an employer paid for healthcare costs in addition to the salary, those are added to the wages for the purposes of the ERC.
- Consecutive Quarters. If you qualify based on revenue loss for any quarter in 2020, then you qualify for the next quarter, even if that quarter didn’t have a 50% loss.
- PPP and EIDL Setoff. ERC recovery by quarter will be reduced by any PPP or EIDL loans that were forgiven attributable to that quarter. However, overages in wages in ERC calculations (i.e. over $10k/employee/quarter) can count against PPP receipts. Often, this can negate your entire PPP.
- Multiple entities. If there are other entities that are 80% controlled by fewer than five people in the initial entity, these must be aggregated. (For example, if there’s one owner of multiple businesses.) Positively, if a shutdown affects one business, it can be deemed to affect the other ones. Negatively, revenue is combined and may result in insufficient losses.
Simple but not that simple, right? Contact us to learn more.