If you haven’t explored the Employee Retention Tax Credit (ERC) yet, you may be missing out on payroll tax relief—even if you had a PPP loan!
ERC is a payroll tax credit available to employers who experienced a significant loss of revenue or had to reduce/suspend operations due to government COVID-19 orders. If you skipped ERC in favor of a seemingly-less-complicated PPP loan in 2020, or have not used any federal COVID-19 relief programs, you may be leaving “free” money on the table! The continuation and expansion of the ERC in 2021 warrants serious consideration. With some review and planning, you may be able to claim thousands or more in payroll support for your organization. (For example, if you have 10 employees and are eligible for the maximum credit on ERC-qualified wages paid in 2020 and the first half of 2021, you may be able to claim $190,000 in payroll tax relief!)
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- Claim thousands in payroll tax credits per employee
- Claim ERC if operations were suspended due to governmental orders, or you experienced a significant decline in revenue
- Retroactively claim ERC even if you had a PPP Loan or EIDL Advance
- If you have 500 or fewer employees, claim advance ERC
- Include the employer share of healthcare costs paid to furloughed employees in ERC-qualified wages
Program updates that save you money!
You may be able to claim thousands in payroll tax credits per employee.
Under the CARES Act, the maximum ERC credit is capped at $5,000 in qualified wages paid per employee for the entire 2020 period, which can be claimed retroactively. 2021 ERC updates increase the maximum credit to $7,000 in qualified wages paid per employee per eligible quarter in 2021. All told, that’s a potential payroll tax credit of $26,000 per employee!
If your operations were fully or partially suspended due to governmental orders, or you experienced a significant decline in revenue, you are likely eligible to claim ERC.
You may claim ERC for qualified wages paid during periods in which operations were limited due to government COVID-19 restrictions, or your organization had a reduction in gross receipts compared to previous quarters.
Calculating the gross receipts reduction is different for 2020 and 2021 ERC:
- 2020 ERC Gross Receipts Percentage: 50% reduction in revenue in any quarter of 2020 compared to the same quarter in 2019
- 2021 ERC Gross Receipts Percentage: 20% reduction in revenue in Q4 2020 compared to Q4 2019; 20% reduction in revenue in Q1 and/or Q2 2021 compared to the same quarter in 2019. If your organization did not exist in 2019, you can use the corresponding quarter in 2020 to measure a reduction in gross receipts. Please Note: The American Rescue Plan (APR) enacted on March 11, 2021, revises some eligibility requirements for ERC. We are still waiting for updated guidance from the IRS to clarify the changes. Stay tuned!
Since ERC rules are ever-changing (and updated, formal guidance is lacking), we recommend visiting the IRS ERC FAQs page for details on how to determine if a quarter qualifies for ERC. Please note that the IRS is still updating FAQs per 2021 ERC revisions.
You can now retroactively claim ERC even if you had a PPP Loan or EIDL Advance.
This 2021 ERC update is a game-changer — you can claim ERC for qualified wages in 2020 even if you had a Paycheck Protection Program Loan (PPP) or Economic Injury Disaster Loan (EIDL) Advance. And you can claim ERC in 2021 with PPP and EIDL. This means even more payroll relief for small employers!
Most employers likely have enough wages to satisfy PPP loan forgiveness requirements and are eligible for ERC, especially if operations were suspended or limited due to government public health orders. However, careful accounting may be needed to show that an employer is not double-dipping and using both programs to cover the same wages (e.g., wages paid with PPP funds that were forgiven, and credits for FFCRA paid leave). This may get complicated since the IRS definition of qualified wages for ERC is significantly different than the definition of eligible payroll expenses for the PPP Forgiveness Application.
Watch our video for an overview of 2021 updates to ERC, as well as considerations for using ERC with PPP loans
Setting aside that the definition of wages is different for both purposes, you have to think about time periods. For example, you have flexibility in your PPP covered period (24 weeks from when you received PPP funds), so you need to consider in which quarters you may have qualified for the payroll credit first—either from a shutdown or gross receipts decline—and use those periods for the ERC.
Also, you might have more than enough wages for PPP forgiveness even when using the same periods, so you have to carefully account for that and have documentation that the wages used for ERC are not the same wages used on your PPP Forgiveness Application.
It’s no walk in the park to analyze all these factors with PPP and ERC, but it may lead to great strides for the future of your organization. (If you’re an ASAP payroll or accounting client, we can help you determine eligibility, calculate qualified wages, and prepare appropriate tax forms. Visit our ERC Support Services page to learn more.)
If you have a PPP loan and have not yet applied for forgiveness – WAIT!
Since wages paid with PPP funds do not qualify for ERC, you should claim the minimum requirement for payroll costs (60% of PPP funds) to free up more wages to qualify for ERC.
Need money now? If you have 500 or fewer employees, you can claim advance ERC by withholding eligible payroll tax payments.
There are few times where it’s OK to not pay employment taxes, and this is one of them. Per the IRS, eligible employers can reduce federal employment tax deposits in anticipation of claiming ERC. They can also request an ERC advance for any amounts not covered by the reduction in deposits.
Of course, this is not an invitation to simply stop paying your share of payroll taxes. You will need to document, report, and certify that you are claiming credits for ERC-qualified wages. And, you need to ensure that you are not double-dipping by excluding wages for which you already received credit, such as FFCRA paid leave or payroll costs included with PPP loan forgiveness.
You can now include the employer share of healthcare costs paid to furloughed employees in ERC-qualified wages for 2020 and 2021.
ERC-qualified wages include employer-paid healthcare costs paid in 2020 and 2021 to employees even if they were not working (e.g., furloughed). Previously, ERC required that wages had to be paid in order to include healthcare costs. This opens up opportunities to review and update qualified wages with healthcare costs to increase credit amounts.
ERC FAQs
Wages for which you received FFCRA payroll tax credit do not count toward ERC qualifying wages. Therefore, you must deduct FFCRA-eligible wages when calculating your ERC amount.
YES! ERC may now be used in conjunction with other federal relief programs as long as the funds are not used on the same wages. And if you had a PPP loan in 2020, you may be able to retroactively claim ERC for qualifying quarters (based on 2020 ERC Guidelines).
Source: IRS Announcement, Employers May Be Able to Claim the Employee Retention Credit and Have a PPP Loan
Employers, including tax-exempt organizations, are eligible for ERC in 2021 if they meet one of the following criteria:
- Full or partial suspension of business operations during 2021 as a result of government order – OR –
- Greater than 20% decline in last quarter of 2020 compared to same quarter in 2019 – OR –
- Gross receipts for calendar quarter in 2021 are less than 80% of gross receipts for same calendar quarter in 2019
Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. In addition, employers may elect to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019. Refer to pages 6-7 of the 2021 ERC Guidance for detailed information on how to calculate ERC credits based on when your organization was in operation.
Simply put, the Employee Retention Tax Credit (ERC or ERTC) is a refundable payroll tax credit available to employers that experienced a significant loss of revenue or had to fully or partially close due to government COVID-19 orders for qualified wages paid March 13, 2020 through Sept. 30, 2021*.
Launched in March 2020 under the CARES Act, ERC was another relief option intended to help keep workers on payroll. Due to its complexity (lots of math), most employers opted for the relatively-less-complicated Paycheck Protection Program (PPP) loan. (Per requirements in the original CARES Act, employers could not use both ERC and PPP in 2020.)
The 2021 Consolidated Appropriations Act (CAA) revised the CARES Act ERC rules so employers can now use both PPP and ERC – including retroactively to 2020. There are some caveats, calculations, and considerations to be made for using PPP and ERC (refer to the SBA’s Cross-Program Eligibility Guide for specific criteria on using different funding options). Still, given that it may result in thousands of more dollars in financial support, we think it’s worth the extra effort. (And if you’re an ASAP payroll or accounting client, we can help!)
*Initially, ERC was available for qualified wages paid through Dec. 31, 2021. However, the “Infrastructure Investment and Jobs Act” removed this credit for the fourth quarter of 2021.
Yes! Answer a few questions on our ERC Quick Eligibility Tool for a preliminary overview of requirements. If you think you are eligible for ERC and you’re a current ASAP Accounting & Payroll client, complete our ERC Support Services Request Form to get in queue for free 20-minute eligibility consultation.
Yes, we can help ASAP clients with preparing and submitting 941-X returns for ERC refunds, as well as 941 returns for 2021 ERC-eligible quarters. Please note that filing 941-X returns is a manual process and the form must be mailed to the IRS, so we cannot estimate when credit refunds will be issued. We will monitor IRS tax reports and communicate updates.
Yes, please contact us if you (or your accountant / tax preparer) filed a 941-X return to claim an ERC refund so we can notate your account accordingly.
Please Note: As your agent of record and to keep your payroll records consistent, we prefer to file 941-X returns for payroll clients. We may also need you to sign a waiver releasing us from liability as your agent-of-record since we did not file those tax documents.
Yes. We can help ASAP Accounting & Payroll clients identify and calculate ERC-eligible wages, and then file 941-X returns to amend previous quarterly filings to claim payroll tax credit refunds for 2020. Please complete our ERC Support Services Request Form to be added to our queue to initiate this service.
Unfortunately, we cannot estimate when you may receive your payroll tax refund from the IRS. We have to manually prepare and mail 941-X returns to claim the credit. The IRS is experiencing significant processing delays in service due to the pandemic. We will communicate regularly to provide service timeline updates. Please Note: As your agent of record and to keep your payroll records consistent, we prefer to file 941-X returns.
Our small-but-mighty ERC Team will work diligently to set up ERC tracking and payroll tax liability reductions prior to your next run.
However, the exact timing for implementation depends on several factors, such as employee count, healthcare costs, coordination with PPP, FFCRA and other federal grants/credits, and the number of clients in our ERC Support Services queue. In addition, we are working through continuous updates in our payroll software related to this process. We ask for patience as we ensure compliance with this new program’s fluctuating rules.
We can also file 941-X returns to retroactively claim credits for ERC-eligible wages paid in prior quarters. (Note: This is a separate service from current-quarter ERC filing.)
No. We need your authorization before we can implement a reduction in your federal payroll tax liabilities for ERC-eligible wages. In addition, we will need to file appropriate IRS returns to document your eligibility for ERC.
Please submit an ERC Support Services Request Form to schedule a free 20-minute eligibility consultation and learn how we can help you.
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