What is ERC?
The Employee Retention Credit is a refundable tax credit equal to 50% of qualified wages an eligible employer paid to employees from March 12, 2020 to December 31, 2020, AND equal to 70% of qualified wages an eligible employer pays to employees for the first three quarters of 2021.
Between 2020 and 2021, the credit is worth up to $26,000 per employee.
Employers are eligible if they operated a trade or business during the pandemic and experienced either a decline in gross receipts or a full or partial suspension of business operations (to include changes in operations due to government and industry-wide mandates and their effects on day-to-day operations). Therefore, even if a business did not see a decline in revenue or experience an actual shutdown, it may still qualify.
Brief History of the Employee Retention Credit Cares Act
The first major legislation to help businesses during the pandemic saw the introduction of the Payment Protection Program (PPP) and the Employee Retention Credit (ERC) when the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 25, 2020.
The PPP received immediate traction as it was easier to understand, more accessible, and less restrictive than its ERC counterpart. Businesses were allowed to only participate in one of the programs and the vast majority chose the PPP over the ERC.
“Original” ERC (2020)
- 50% of wages back per employee in 2020, for qualifying businesses, up to a $10,000 wage threshold (maximum $5k credit per employee for the year)
- Business must show a 50% drop in gross revenue when comparing a quarter in 2020 v same quarter in 2019 -OR- meet government mandate qualification
Consolidated Appropriations Act & American Rescue Plan
By the end of 2020, as the pandemic continued to take its toll on American businesses and Congress acted by passing the Consolidated Appropriations Act on December 27, 2020 and, a few months later, the American Rescue Plan in March of 2021. They realized that the ERC had been severely underutilized and made some drastic changes to the program in order to expand eligibility and “supercharge” the amount of credits available to qualifying businesses.
“Expanded” ERC (2021)
- Businesses that received the PPP are now eligible to qualify for the ERC
- 70% of wages back per employee up to a $10,000 wage threshold (maximum $7k credit, per employee, PER QUARTER for the first three quarters of 2021)
- Business must show a 20% drop in gross revenue when comparing a quarter in 2021 v same quarter in 2019 -OR- meet government mandate qualification
Claiming the Credit
Contact us for a free consultation to discuss your business, the ways in which you might qualify, and how we can assist with your retention credit claim.
FAQs about the ERC
What is the Employee Retention Credit ERC?
The Employee Retention Credit under the CARES Act offers monetary support to businesses that kept employees on their payroll during the height of the pandemic. The refundable tax credit is available for both 2020 and 2021 for wages that were paid by an eligible employer whose business has been financially impacted by COVID-19. The full credit amount available is 50% of up to $10,000 in wages per employee for the whole year in 2020 and 70% of up to $10,000 in wages per employee per quarter in 2021.
We did not have a drop in revenue; are we still eligible for the ERC?
You may be! Companies can either qualify due to a drop in gross receipts over a certain threshold–OR–due to a full or partial suspension in business operations. We have helped many businesses that have been more profitable than ever but still qualified due to impact from government mandates.
A common misconception about the government mandate qualification is that the business must have shut down due to Covid mandates in order to qualify. However, the guidance that the IRS has developed demonstrates that this qualification also includes businesses that had more than a nominal impact to
their business operations due to government orders related to Covid.
Why haven’t I heard about this from my financial advisor?
The ERC has undergone significant changes and updates since it was first introduced in the CARES Act. For any professional not solely focusing on the ERC, it may have been too much to keep up with. There is still significant misunderstanding of the program based on previous versions of the law, and unfortunately, many business owners are disqualifying themselves due to poor guidance or misinformation. Understanding the full intricacies and subsequent guidance of the ERC law is our specialty, and we encourage you to let us take a look to see whether you qualify.
Why should I pick Clarity over some of the other tax consulting companies that handle the ERC?
Clarity’s foundation is based on two guiding principles: client education and an ethical flat-fee structure. These values set us apart because most ERC consulting firms charge a percentage-based fee which is problematic in several ways. Not only does it lead to unconscionable fees for services provided, a percentage-based fee structure also incentivizes the consultant to encourage a much more aggressive claim than may be sensible for your company. Because of this, percentage-based consultants are more likely to engage in predatory behavior and less likely to offer proper and thorough education about the ERC, the IRS guidelines, and the strength of your claim. Clarity’s approach is to offer a free analysis up-front which provides a thorough picture on whether your company is eligible, how strong an argument you have if you’re qualifying under the subjective government order qualification, and what amount of refund you can expect per qualifying quarter.
My business received the PPP, can I still qualify for the ERC?
YES. Although the ERC was initially not available to companies that received the PPP, a retroactive amendment was passed in December 2020 that allows companies to be eligible for the ERC even if they received one (or both!) of the PPPs through the SBA. Employers do need to identify the wages paid with the PPP and cannot use those as qualified wages for the ERC. We thoroughly account for any reported PPP funds during our analysis of your company to ensure that IRS guidelines are followed regarding PPP/ERC interactions.