Contributed by: LMR ERC Task Force
The Employee Retention Credit (ERC) is a CARES Act relief program that allows for a refundable federal tax credit against payroll taxes. It is designed to help businesses, including tax exempt organizations, who chose to keep their employees on payroll.
The credit can be significant to eligible businesses.
Who is Eligible?
1) A business who was fully or partially shut down due to a mandated government order (federal, state, county, or city)
A business who had decreased revenue:
- 2020 quarterly revenue decreased by 50% or more compared to same quarter in 2019
- 2021 quarterly revenue decreased by 20% or more compared to same quarter in 2019
2) Small businesses:
- In 2020: businesses with fewer than 100 full time employees
- In 2021: businesses with fewer than 500 full time employees
NOTE: Q4 2021 used to be eligible, but was discontinued for all but recovery startup businesses in the infrastructure bill in late 2021.
Businesses may be eligible for both the Paycheck Protection Program (PPP) and the ERC.
For the purposes of the ERC, a full-time employee (FTE) is defined as having worked a minimum of 30 hours a week or 130 hours a month. Multiple part-time employees may be combined for an FTE equivalent.
What is the Possible Credit Amount?
- For 2020: 50% of wages for each qualifying employee up to $10,000 (up to $5,000 credit for the year)
- For 2021: 70% of wages for each qualifying employee up to $10,000 per eligible quarter (up $7,000 credit per quarter or $28,000 credit for the year, if eligible for all four quarters)
What Documentation Do I Need to Apply?
- An income or profit & loss statement by quarter showing revenue compared to 2019
- Federal and state quarterly payroll filings (such as Forms 941)
- PPP (draws 1 & 2) applications and forgiveness documentation along with identification of PPP coverage periods
- Payroll registers showing total gross wages
- State unemployment reports
- Health insurance listed by employee with the portion paid by the employer broken out (if any)
Is it Too Late to Apply for the 2020 Credit?
Eligible businesses are still able to apply for the 2020 credit through the amended return process.
As with most tax areas, each situation is unique. Please consult your tax advisor at Leone, McDonnell, & Roberts, P.A., for matters specific to your case.