The employee retention credit (ERC) has generated a lot of questions from employers in the last year. The credit was first enacted as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020. More recently, it was extended and modified by the Consolidated Appropriations Act, 2021 (CAA) in December 2020, and again by the American Rescue Plan Act in March 2021. We’ve compiled a list of some frequently asked questions and answers about the ERC, based on our March 2 webinar, "Taking advantage of the employee retention credit." Additional guidance, including flowcharts for determining ERC eligibility, can be found here.
How do I file for the ERC?
The ERC is claimed through payroll tax filings, but the process depends on whether you are claiming credits for prior calendar quarters or the current calendar quarter.
For prior quarters, you must file an amended payroll tax return (941X) for the quarter that qualified wages were paid. An amended filing may be completed to either initially claim these credits or to increase the amount of credits claimed based on an updated eligibility analysis or credit computation. A special rule applies to employers that wish to retroactively claim credits for 2020 with respect to payroll funded by a Paycheck Protection Program (PPP) loan where forgiveness is subsequently denied. In that case the credits may be claimed by filing a 941X for Q4 2020, irrespective of the quarter in which the qualified wages were paid in 2020. The credits may be claimed by filing a 941X for Q4 2020, irrespective of the quarter in which the qualified wages were paid in 2020.
For the current quarter the ERC is reported on a timely filed payroll tax return (941). However, you can access cash benefits by:
- Retaining payroll tax deposits, and/or
- Requesting an Advanced Refund of Employee Retention Credit (Form 7200), and/or
- Requesting a refund on a timely filed payroll tax return (941).
How do I calculate full-time employees for purposes of the ERC? Are owners counted?
For each month of 2019, identify the number of employees who worked at least 30 hours per week or 130 hours per month. Then sum all months and divide by 12 to get the average for the year. There is no equivalent concept for this calculation — in each month, count each employee as either a 0 or 1.
Some owners can be included in the full-time employee calculation; however, many owners are not. Those who can’t be counted as a full-time employee include: a sole proprietor, a partner in a partnership, and a 2% S corporation shareholder.
When calculating quarterly gross receipts for comparison, is there any requirement that the calculation use cash or accrual basis? Does the calculation need to follow income tax or GAAP rules?
Quarterly gross receipts should be calculated for the calendar quarter using the applicable tax basis gross receipts rules. These are generally receipts from all sources, including investments, as reported for income tax purposes using whatever method is used for tax.
Can I claim the ERC if I paid wages that were part of a PPP forgiveness application?
Possibly.
The same wages can’t be used to claim the ERC and support PPP loan forgiveness. Thus, wages included in payroll costs on a PPP Loan Forgiveness Application up to the minimum amount of payroll costs sufficient to support loan forgiveness are disqualified for the ERC. Any excess wages above the amount supporting PPP forgiveness can be included in your ERC-qualified wages. Therefore, the details of a previously filed PPP forgiveness application will impact the availability of credits.
Should the calculation of gross receipts include proceeds of PPP loans received during a quarter? Or amounts forgiven?
The coordination of PPP loan forgiveness and the gross receipts calculation is a complicated topic. The statutory text doesn’t provide an explicit rule, and the IRS hasn’t directly addressed this. Under general tax principles, loan forgiveness, even if tax-exempt, would be included in gross receipts. Depending on specific facts and circumstances, it’s possible that this could disqualify an employer from ERC eligibility in a particular quarter. For those fact patterns, we recommend careful consideration of the timing of loan forgiveness recognition and potentially waiting for additional guidance from the IRS before claiming ERC.
Do “stay-at-home” orders qualify as restrictions on business operations to the extent that they force office employees into a telework situation? What if they limit the ability of customers to come into an in-person public business?
In general, if the employer is able to continue operations comparable to those before the stay-at-home order, the operations wouldn’t qualify as “suspended.” The following factors should be considered when determining if the employer is able to operate comparably: telework capability, portability of the work, need to be present in the workspace, and transition to telework operations.
If customers are unable to come to a business because of a stay-at-home order, this doesn’t mean that the business is subject to a suspension of operations. However, the impact of reduced customers due to a stay-at-home order could result in a quarterly decline in gross receipts.
If a suspension covers parts of multiple quarters, is each full quarter eligible for the credit or just wages paid during the suspension?
If an employer is eligible for the ERC on the basis of a government order suspending its operations, then it’s only eligible during the period of suspension. This means that the credit is only calculated based on wages paid during the dates of full or partial suspension. In this respect, the effective dates of government orders are crucial to supporting an ERC calculation. The rule is different for an employer that is eligible due to a gross receipts decline since that form of eligibility lasts for the entirety of the quarter.
What payments count as wages for purposes of the ERC?
Wages include all wages paid by the employer that are subject to FICA, plus qualified health plan costs. There are some wages that need to be excluded, such as severance for all employers and vacation pay for large employers. Wages used to calculate various other credits may be ineligible as well.
When the ERC refers to “wages paid while not providing services,” does this relate only to shutdowns or can it apply to an employee being paid while sick or quarantining? What about an employer who pays some sort of termination pay to employees that are being laid off?
This rule applies to an employer that is both eligible for the ERC, due to a government shutdown order or gross receipts decline, and which had a full-time employee count in 2019 that exceeds the threshold amounts (100 for the 2020 credit and 500 for the 2021 credit). This also requires coordination with other payroll-based programs, such as those included in the Families First Coronavirus Response Act (FFCRA).
Private employers with less than 500 employees and all government employers were required to provide paid sick leave and paid family leave to employees for several types of COVID-19-related reasons. The requirement to provide this paid leave began on April 1, 2020, and expired on Dec. 31, 2020. Paid leave that was either mandated by the FFCRA in 2020 or is eligible for expanded FFCRA credits in 2021 is ineligible for ERC.
Employers may be able to include paid leave that’s excluded from the FFCRA programs during the period of employer eligibility, regardless of whether the employee is sick or quarantining. However, this doesn’t include any paid leave benefits that were previously accrued under an existing benefit plan. Severance to former employees is also not qualified for ERC.
If a business has operations both inside and outside the United States and a plant outside the United States was shut down by a government order, would it qualify for the ERC on U.S. payroll based on the shutdown criteria?
Notice 2021-20 says that orders, proclamations, or decrees from the federal government or any state or local government may be taken into account. This would not include foreign governments but does include tribal governments or U.S. territories.
How do the employee-count aggregation rules apply to businesses with operations outside of the United States? Is there any different treatment if the business is structured so that the non-U.S. components are separate entities, either parent or subsidiary?
Foreign entities and locations are included as members of a controlled group. However, when counting the number of full-time employees in 2019, for purposes of determining if you’re over or under the employee headcount threshold, you can exclude foreign employees.
Looking for more answers?
These questions and answers represent just a small sample of the discussions we’ve had with businesses about the ERC. To learn more about how the credit applies to the specific facts and circumstances of your business, please feel free to reach out.
