Fact vs. Fiction Concerning the Employee Retention Credit Program

employee retention credit program
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We will jump right in and assume you know about the employee retention credit program, including what it is, the benefits of the ERC, how you can use credits, and eligibility. The government’s constant changing of the rules and requirements to qualify for the credit leaves many business owners scratching their heads when trying to figure it all out.

Juggling all the rules and regulations of payroll is difficult on its own. Then comes a new program with the intent of helping those suffering because of the COVID-19 pandemic. Many eligible employers have not taken advantage because they fear making a costly application mistake or don’t think they qualify

ERC Today is taking all the guesswork away and laying out the facts vs. fiction of ERC. You” be able to make an informed decision on whether you need to apply for this program. If the answer is yes, we will help you with all the paperwork necessary to process your refunds for 2020 and 2021.

Fiction: Must Have a 50% Drop In Revenue

Fact:  The Consolidated Appropriations Act (CAA) of 2021 changes the qualifying reduction from 50% to 20% for the first three quarters of 2021. This applies to all businesses, even if they are essential and open throughout the pandemic.

The IRS Bulletin 2021-23 provides information on using an alternative quarter election to make things easier. This allows a review of the prior quarter when determining a loss of 20% or more.

The IRS Revenue Procedure 2021-33 provides a safe harbor, allowing the exclusion of some gross receipts when determining eligibility. These include the amount of PPP loan forgiveness, restaurant revitalization grants, and shuttered venue operator grants.

To be eligible, you must show the business had fully or partially suspended operations. Alternatively, you must show a significant decline in receipts. You only need to meet one of those qualifications.

Fiction: My Business Opened in 2019 So I Don’t Qualify

Fact:  Businesses opening in 2019 use the quarter they began operating as a base for determining quarterly revenue declines. This applies until the business is in operation for an entire year.

If your business began operating in Quarter 2 of 2019, the revenue from that quarter sets the base. Use that amount when determining a decline in receipts during Quarters 1 or 2 of 2020.

Determining employee retention credit eligibility and calculations can be confusing. We recommend you seek professional assistance processing your ERC benefits application, so you do receive all credits you qualify for.

Fiction: Business Is Ineligible if Participating in the Payroll Protection Program

Fact: This was at one time true. Those participating in the Payroll Protection Program were ineligible until the Emergency Coronavirus Relief Act of 2020. This Act changes eligibility for both ERC and PPP retroactive to March 27, 2020.

The only reason wages may not qualify for ERC is if they fall under payroll costs when obtaining PPP loan forgiveness. All other qualifying wages are eligible for ERC.  

Fiction: Business Must Shut Down During the Pandemic to Qualify

Fact: There are many qualifying factors impacting a business. This includes limiting hours of operation, a disruption to the supply chain, or a significant decline in revenue. One or a combination of several factors, including a partial shutdown, are qualifying factors.

Voluntary changes in business hours do not qualify as a partial suspension. If your business is open, but regulations force you to shorten the hours of operation, you are eligible. The restriction in hours must be due to a local, state, or federal government mandate.

Fiction: Must Have Less Than 500 Employees

Fact: The manner of counting employees for PPP loans and ERC are different. PPP uses headcount rules from the Small Business Administration Guidelines. The program calculates every person you employ for each pay period.

The ERC uses the Internal Revenue Code for determining employees. You only count those working a minimum of 30 hours per week, or 130 hours per month, as outlined in IRC § 4980H. You may use several part-time employees by combining one or more employees and dividing by 130 to create full-time employee equivalents.

You may have over 500 employees, but if some of those are only part-time workers, they do not count. You also need to make sure you file only for qualifying employee wages.

Some people working full-time may not qualify. You and other family members may not count as full-time employees even if working over 40 hours a week.

There are other factors, such as healthcare costs, that you may be able to include in determining your employee wage amounts.

Fiction: You Must Have a Decline in Revenue the Entire Year

Fact: Calculations for the ERC are made for each quarter individually. You must compare each quarter with the same quarter in 2019 when determining whether the business is experiencing a loss and its percentage.

If you have:

  • A 75% decline in the 1st and 2nd quarter
  • A 10% loss in the 3rd quarter
  • A 50% decline in the 4th quarter

You will qualify for ERC in three quarters that year. The only quarter you will not receive credit for is the 3rd quarter. Revenue loss in the 3rd quarter does not meet the minimum requirement.

Fiction: Non-profit Organizations Cannot Claim ERC

Fact: Non-profit organizations, including churches, museums, and hospitals, are eligible for employee retention credit. You may claim up to $5,000 in credits for every employee on your payroll in 2020. For 2021, you may claim up to $7,000 per employee.

Fiction: Employee Retention Credit Program Lost by Not Filing in 2020 or 2021

Fact:  Qualifying businesses have an opportunity to file for retroactive ERC credit in 2022. You need to file an amended Form 941-X. The IRS allows filing corrections within three years of the original quarter to receive a refund.

Because of how the ERC defines wages, the credit helps you pay wages to employees not working because of the pandemic. If you paid employees not coming into work because of a government shutdown order or a decline in your company’s gross receipts, you can receive reimbursement of taxes paid.

If you have questions such as how to apply, how credits work, the application deadline, and how to handle credits if you own multiple businesses, ERC Today can help.

Do You Meet ERC Refund Qualifications?

If you qualify for the Employee Retention Credit Program and file retroactively, you can receive a refund for credits from 2020 and 2021. ERC Today will analyze your situation and determine whether you need to file for ERC or PPP and will help you amend your quarterly Form 941. 

Contact ERC Today for additional information and answers to all your ERC questions.

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More Great Information For Employers:

When President Biden signed the Infrastructure Investment and Jobs Act into law, the Employee Retention Credit sunset date was moved from 12/31/2021 date to 9/30/2021 (for businesses other than ARPA Recovery Startup Businesses). 

HOWEVER, this does not mean the ERC was eliminated! Eligible businesses can still apply for stimulus funds based on financials between 3/13/2020-9/30/2021.