Navigating the Complicated Web of the Employee Retention Tax Credit

Many of you have been asking questions about the Employee Retention Tax Credit (ERC) for 2020.  Up to this point, we have been reluctant to issue official firmwide guidance as we have been waiting on the IRS to do the same.  As of the date of this publication, we have been patiently awaiting the IRS to issue its final rules on the ERC, but alas, we continue to wait.  (This link should be updated when the IRS officially decides how to handle the ERC.) While we wait, we wanted to issue some guidance that may help you decide how to address this credit.

The ERC is a refundable tax credit against employer Social Security tax equal to 50% of the eligible wages paid from March 12, 2020, to December 31, 2020, up to $10,000 per employee (so $5,000 credit per employee).  You become eligible for the credit if you were “fully or partially” suspended from work due to government order.  (Thanks to FAQ #34 example 4, we would interpret that to mean all of our Doctors.)  These credits can add up to a lot of money, but be cautious - ERC cannot cover the same payroll already reimbursed by PPP funds.

With the information we have today, it looks like this credit will be broken down into two main categories:

• Did you pay employees while you were closed due to COVID?

• Did you experience a 50% drop in revenue when comparing Q2 2020 with Q2 2019?

Did you pay employees while you were closed due to COVID?

If the answer to this question is yes, then at this point, we see no reason why you would not be eligible for the ERC for wages paid during the term of your closure beginning with the later of March 12, 2020, and closure beginning to the end of your closure period. If you chose a 24 week PPP covered period; then you can stack your PPP covered wages toward the end of your PPP period and use ERC credits to cover wages paid while you were closed.

If the answer to this question is no, then you have no wages to pay during a closure due to government order and therefore have no wages to use for the credit.

Did you experience a 50% drop in revenue when comparing Q2 2020 with Q2 2019?

This is a high threshold to cross.  The majority of businesses in the middle of the country will not be able to show a 50% drop in revenue, but if you are located on either coastline, you may.  If you can show a 50% drop in revenue in Q2 2020 when compared to Q2 2019, you are able to take the credit from March 12, 2020, to the end of the 2020 quarter in which your revenue reaches 80% of 2019 levels.   This means you can take the ERC credit for a longer period and will definitely mean that this amount will be greater for you.  However, proceed with caution here.  The ERC cannot be applied to wages already reimbursed by PPP funds.  This means you will need to carefully review payroll reports and PPP forgiveness applications to compare the two and make sure to count only wages not reimbursed by PPP funds in your ERC calculation. 

The above calculation will not be an easy one and will likely need the assistance of both your payroll specialist and CPA to arrive at the correct number. 

Finally, if you qualify for the ERC under either circumstance above, then you will need to amend the applicable 941s to obtain the refund.  Work with your payroll specialist to get this accomplished.

ERC for 2021

The ERC program does not expire at the end of 2020 and is available for those offices off to a rocky start to 2021.  If you are down 20% or more in Q1 or Q2 of 2021 compared to the same quarter in 2019, the credit is actually larger –70% of wages up to $14,000 per employee.  You will need to review your quarterly revenue in April and July of 2021 for the previous quarter to see if you qualify.