Employee Retention Credit: An Alternative to the PPP Loan
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable tax credit intended to encourage business owners to keep their employees on the payroll and minimize the number of workers filing for unemployment benefits. An employer is not eligible for the Employee Retention Credit if they receive a loan under the Paycheck Protection Program.
How is the credit amount determined?
The tax credit is equal to 50% of qualified wages that eligible employers pay their employees in a calendar quarter. Qualified wages are wages and compensation paid to an employee and include qualified health plan expenses that are properly allocable to the wages. The credit applies to wages paid after March 13, 2020, and before January 1, 2021. Eligible wages per employee max out at $10,000, so the maximum credit for eligible wages paid to any employee during the qualifying period is $5,000.
Who is eligible for the Employee Retention Credit?
An eligible employer must carry on a trade or business during calendar year 2020 and must meet one of two requirements:
The operation of the employer’s business is suspended fully or partially due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19, or
The employer’s business experiences a decline of more than 50% in gross receipts for a calendar quarter of 2020, compared to the same calendar quarter in 2019.
Who is not eligible for the Employee Retention Credit?
Government employers are not eligible for the Employee Retention Credit. Self-employed workers are also not eligible for the ERC for their self-employment earnings.
Qualified wages for smaller employees
For employers that had an average of fewer than 100 full-time employees in 2019, qualified wages are those paid to any employee during the period that its operations are fully or partially suspended due to a government order or the period of a decline in its gross receipts. The period of decline in gross receipts begins with the first quarter of 2020 in which there is a more than 50% decline in gross receipts (compared to the same quarter of 2019) and ends on the last day of the first subsequent quarter in which the employer’s gross receipts are more than 80% of those for the corresponding quarter of 2019. Many small businesses have employees who “wear many hats,” and the ERC rules give businesses with fewer than 100 employees more leeway in eligibility requirements. These businesses can claim the credit for wages paid to all employees, rather than just the employees who are not working due to closure.
How can eligible employers receive the Employee Retention Credit?
If you are eligible, you can receive an Employee Retention Credit in any of three ways:
- You can claim credits on your quarterly employment tax return (form 941), beginning with the second quarter of 2020, by reporting your total qualified wages for the quarter (the Q2 return can also include qualified wages from Q1).
- You can reduce the amount of employment taxes you are required to deposit with the IRS for each payroll cycle by the amount of the ERC to which you are entitled, without penalty.
- You can submit Form 7200 to receive an advance refund of the ERC from the IRS. You can file Form 7200 any time during a quarter and request a refund of the ERC anticipated for that quarter (less any amounts received through reduction of payroll deposits). You can file multiple times for a quarter if the amount of ERC you anticipate increases. The last date to file Form 7200 for a given quarter is the end of the month following the quarter.
Which is better for my business, the ERC or PPP?
Both the Employee Retention Credit and Paycheck Protection Program are intended to keep employees on payroll and out of the unemployment office. However, receiving a PPP loan renders your business ineligible for the ERC. So, it is important to weigh the pros and cons of each and make an educated decision.
Please contact us if you would like to discuss further.