The latest Stimulus Bill announced an exciting new addition called the Employee Retention Credit that will allow businesses to claim more funds to support them during the pandemic. While the ERC was part of the first stimulus package, the updated rules regarding this credit will open new opportunities for businesses to claim both the ERC, and the PPP.
What is the Employee Retention Credit (ERC)?
The Employee Retention Credit (ERC) is a tax credit designed to help small businesses recover from the impacts of Covid-19 on their business. The ERC is NOT a loan, it is a tax credit, meaning that it does not have to be repaid. In the first stimulus, businesses were only allowed to claim one of the PPP or the ERC, not both. That rule has been changed, and now businesses can claim both funding opportunities, providing much needed relief and help.
How Much Can I Claim with the ERC?
Because of the new rules in the latest stimulus, businesses can retroactively claim the ERC credit for 2020, as well as 2021. The amount you can claim depends on which year you are claiming funds for.
For 2020: The ERC will pay out up to $5,000 per employee, depending on their wages earned for the quarters the business was impacted.
For 2021: The ERC will pay out up to $7,000 per employee, and can be claimed for both Q1 & Q2, meaning it can be claimed twice, making the value potentially $14,000 per employee.
An important thing to note is that you are not allowed to claim forgiven PPP wages towards your ERC credit, so make sure you work with an accountant that can review your records and claim as much funding as possible, without “double dipping” in free funds.
Small Business Example
Let's take a look at an example of a 3 person business, and how much they could claim for the ERC for 2020. Remember, the max you can claim per each employee is $5,000, otherwise, it will be half of what they made in that quarter:
Employee 1 was paid $16,000 through Q2
Employee 2 was paid $10,000
Employee 3 was paid $7,000
Employees 1 & 2 both qualify for the max amount of $5,000, while Employee 3 qualifies for $3,500, meaning the company in total could claim $13,500 in funding from the IRS.
How Do I Know if I Qualify?
The IRS will be looking for your business to meet one of two key factors to qualify for the ERC:
-A decrease in revenue over a specified quarter. To retroactively claim the credit for 2020, you must show a decrease of 50% or more over any given quarter. For 2021, you only need to show a 20% decrease in revenue, and if this revenue decrease happens in both Q1 & Q2, you can claim the ERC twice.
-A “Full or Partial” Closure of your business. This can include local governmental restrictions or mandates restricting the number of employees or customers in your workplace, disrupted operations (keeping 6 feet from clients), being forced to work from home, or completely closing your business operations for an extended time period.
Your business only needs to fit under one of the above restrictions in order to qualify for the ERC.
Things To Note
Our team is happy to provide this service for you, but please be aware that we must charge for our time and effort. While banks can make money simply from processing the loans they sign, we do not make any money from the IRS for providing this service. We charge $500 per employee that qualifies for the max amount. Any employees that qualify for less will get discounted pricing. We only charge those that qualify for the ERC, and will be guaranteed a return from the IRS.
The funding does not arrive as quickly as PPP does. The IRS will send a check as soon as your ERC filing has been processed, but that process can take over 4 months. Do not be surprised if you find yourself waiting longer than expected for the funding to arrive.
Businesses that have claimed the EIDL (either the grant or the loan) still qualify for the ERC. Similar to the PPP, you just need to make sure you aren’t using the EIDL funds towards the “qualified wages” for the ERC (this counts as “double dipping”)
Only W2 employees are eligible for the ERC. If you are paid through a 1099, there are alternative solutions to help you claim funding, including setting up your own LLC, instead of filing a Schedule C. COS Accounting is happy to talk with anyone about their situation and what options are available to them.
Businesses can technically claim the ERC three times. Once for 2020, and twice for 2021. Because 2021 just started, we recommended starting with 2020, and then tracking closely if your business meets the criteria for Q1 (Ends in March) and Q2 (Ends in June) for 2021.