Many business owners have looked at the Employee Retention Credit program to secure up to $33,000 per employee, but some may not have looked at it closely, leaving very valuable dollars on the table.
In March 2020, the world changed. Almost overnight, business owners were concerned about health, the economy and the sustainability of their operations. With great fanfare, the government came out with the Coronavirus Aid, Relief and Economic Security Act, better known as the CARES Act, which contained many programs for business owners. The most talked about program, by far, was the Paycheck Protection Program, or PPP, which proved to be valuable for many PR and marketing businesses. As projects and retainers were put on hold—especially for those working with the hospitality and travel industries—PPP funds provided the life vest needed to weather the storm.
Another significant program to debut under the CARES Act was the ERC, a refundable credit based on wages paid to eligible employees. Under the CARES Act, companies couldn’t claim the ERC if they were awarded PPP funds. Businesses also initially were only able to claim the ERC if they had no more than 100 full-time employees in 2019, with certain exceptions. Subsequent updates to the ERC, which were signed into law in late 2020 and early 2021, expanded ERC eligibility requirements. Key changes included the definition of eligible employers to include those with no more than 500 average full-time employees in 2019 for the 2021 ERC. The changes also retroactively allowed businesses that received PPP loans to now apply for the ERC.
Businesses that obtained PPP may now be able to receive ERC money up to $5,000 per employee for 2020 and $28,000 per employee for 2021.
Have you taken advantage of this credit program? If yes, congratulations! Many owners are still unaware—nine months after the change in law—that their business may qualify. Many also incorrectly believe they don’t qualify, which begs the question …
How do you qualify?
Qualifying can be a bit complex. Let’s start with 2020. If you averaged 100 or fewer full-time employees in 2019, you’ve passed the first test! Next, did any COVID-related government orders interrupt your operations? For many PR and marketing firms, this answer is no. While your offices may have been closed, you generally were able to serve your clients in a remote environment at near full capacity. If, on the other hand, you were forced to close and were unable to operate, you may be eligible on wages paid during this shutdown period. The 2020 ERC is calculated as a 50 percent credit on qualifying wages and certain benefits up to $10,000, per employee, resulting in a maximum credit of $5,000 per employee for the year.
My business wasn’t shut down, can I still qualify?
Yes, you can! The pandemic hit many PR and marketing firms hard, especially in the second quarter of 2020. If, in any quarter of 2020, you experienced a decline in gross revenue of 50 percent or more as compared to the same quarter in 2019, you may qualify.
Example: Your business earned $2.5 million in the second quarter of 2019. This is top line, gross revenue. Fast forward to the second quarter of 2020. Your business took a hit, and its gross revenues were $1 million for the quarter. This represents a 60 percent decrease in revenue and, as a result, makes your business eligible to claim the ERC in that quarter. Your credit would be 50 percent of qualifying wages and certain benefits paid in that quarter, up to $10,000 (or $5,000 per employee).
There’s a catch. If you received PPP funds, you can’t take the ERC on any wages used for PPP forgiveness. However, wages in excess of those allowed for PPP forgiveness, or those otherwise not used for PPP forgiveness, could qualify for the credit. In addition, if you experienced a decrease in revenue during a quarter of 2020 compared to the same quarter of 2019 of 50 percent or more, you automatically qualify for the next quarter, and any wages paid in that following quarter could also qualify for the ERC. For 2020, this credit is capped at $5,000 annually.
If you averaged more than 100 full-time employees in 2019, you are only able to take the ERC on wages paid to employees on leave for COVID-related issues (in other words, you continued to pay employees who were not working). The credit is calculated the same way as shown above.
Let’s talk about 2021. How do you qualify?
You could still qualify if you paid wages to employees during a government-mandated shutdown or to those on leave for COVID-related issues.
It’s easier to qualify for the 2021 ERC based on a decrease in gross revenue, so many PR and marketing firms may be eligible. Businesses that averaged 500 or fewer full-time employees in 2019 now qualify if they experience a 20 percent decrease in top line gross revenue in any quarter 2021 compared to the same quarter in 2019.
Example: In the second quarter of 2019, your business earned $2.5 million in gross revenue and $1.975 million in the same quarter of 2021. This represents a decrease in gross revenue of 21 percent, which means you qualify for the ERC in that quarter. The credit for 2021 increases to 70 percent of qualifying wages and certain benefits up to $10,000 per employee resulting in a maximum of $7,000, per quarter, per employee. That equates to a maximum credit of up to $28,000 per employee for the year. Remember, if you received a PPP loan in 2021, you can’t use the same wages for the ERC.
If you had more than 500 fulltime employees in 2019, the credit is only available on wages paid to employees not providing services during the qualifying period in 2021.
The ERC can be obtained by amending payroll tax filings or making certain elections on current payroll tax filings. There are a lot of other complexities to the program, such as more detailed rules around governmental orders, related entities, majority ownership rules, automatic qualification for subsequent quarters, the definition of full-time employees (this is different than the PPP definition) and the tax consequences.
It’s best to speak to your accounting advisor to learn more about the program and find out if you qualify. Most importantly, don’t put yourself in the position to leave money on the table!
Dominic Rovano, CPA, is a Co-Partner in Charge of Janover LLC’s New York City office