Employee Retention Credit
The Basics of the Employee Retention Credit
By Mack Bekeza, CFP®
As of April 16, 2020, the Payroll Protection Program (PPP) has exhausted its $349 Billion in funding for small businesses. So if you were considering applying for the PPP but were not able to submit your application, what else has the CARES Act provided to help small businesses out? Fortunately, the CARES Act has established a tax credit called the Employer Retention Credit. Before reading further, If you already have a PPP loan in place, you will not be able to receive this credit.
So what exactly is the Employer Retention Credit (ERC)?
A way to encourage businesses to retain employees on the payroll, the ERC is a refundable tax credit to reimburse 50% of up to $10,000 of qualified wages paid by an eligible employer to an employee. In other words, a qualified employer can receive a credit of up to $5,000 per employee paid for 2020.
What makes an employer eligible for the ERC?
An eligible employer is anyone who maintains a trade or business during 2020, including organizations that are tax exempt. However, there are two caveats:
- The employer had to either partially or fully suspend operations during any quarter of 2020 from government orders.
- Have a significant decline in gross receipts during any calendar quarter of 2020. The IRS stated that “significant decline in receipts begins with the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 percent of its gross receipts for the same calendar quarter during 2019.”
To make the IRS’s definition easier to grasp, here is a visual example.
Let’s say John Appleseed, Inc. had the following gross revenues for 2020 and 2019:
|2020||2019||Decrease from 2019|
Since the decline in revenue began in Q1 of 2020, only being 48% of Q1 2019, but came back strong in Q4, with revenue being 95% of Q4 2019, the employer will be eligible for the tax credit for quarters one, two, and three of 2020.
One more item to note is that Governmental Employers are not eligible; neither are self-employed individuals for their self-employment services or earnings.
What are qualified wages?
These are wages paid to employees after March 12, 2020 and before January 1st, 2021.
I was subject to pay sick and family leave wages as a result of the Families First Coronavirus Response Act (FFRCA), can I still get this credit?
YES! Just not for the same wages.
Anything else I should know?
Although we have given some high points about the ERD, there are numerous nuances and even potential benefits regarding this credit; the IRS has also provided a detailed FAQ page regarding the ERC. And one last thing to note, we are Financial Planners, not CPAs. If you are seriously considering taking this tax credit, please consult with a CPA before doing so, we do not give tax advice!