What You Need to Know About the Employee Retention Credit
August 31, 2022
Note: This fact sheet was revised on December 6, 2021 to reflect recent updates to the ERC.
The Employee Retention Credit (“ERC”) is a refundable tax credit for employers who keep paying employees despite temporary business closures or revenue declines due to COVID-19.
2020 Employee Retention Credit Eligibility
Employers of any size that had more than a 50% decline in gross receipts in any calendar quarter as compared to the same calendar quarter in 2019.
2021 Employee Retention Credit Eligibility
Employers of any size that had more than a 20% decline in gross receipts in Q4 2020, Q1 2021, Q2 2021 or Q3 2021 as compared to Q4 2019, Q1 2019, Q2 2019 or Q3 2019.
| ERC | 2020 Rules (1 Credit) | 2021 Rules (3 Credits) |
|---|---|---|
| Credit Type | Refundable Payroll Tax Credit to Eligible Employers – Credit is larger than the initial payroll tax liability. | Refundable Payroll Tax Credit to Eligible Employers – The credits are larger than the initial payroll tax liabilities. |
| Credit Applicability | Qualified Wage Paid after March 12, 2020 and on or before December 31, 2020 | Qualified Wage Paid after December 31, 2020 and on or before October 1, 2021 |
| Credit Amount | 50% of Qualified Wages (Maximum $10,000 per employee per year) | 70% of Qualified Wages (Maximum $10,000 per employee per quarter) |
| Max Credit | $5,000 Per Employee | $21,000 Per Employee |
Filing Topics
Income Tax Effects
Wage deductions for income tax purposes must be reduced by the amount of the 2020 credit on the 2020 income tax return and by the amount of the 2021 credits on the 2021 income tax returns.
Gross Receipts Test / PPP Forgiveness
PPP forgiveness does not create gross receipts for purposes of the ERC Eligible Employer tests.
Monetization
- Refund claims for the 2020 ERC are taking up to nine months to be issued by the IRS.
- Amended claims for prior quarters in 2021 can be reflected on currently filed Forms 941 to speed up the timing of refunds.
- When receiving the ERC refund, the typical journal entry includes a debit to the Payroll Tax Liability and a credit to Compensation Expense and Benefits Expense (as applicable
PEOs
Utilizing Form 7200 for Advanced Payment in claiming the ERC prior to Form 941 being filed. This tip allows direct receipt of the ERC refund from the IRS instead of the ERC flowing through the PEO.
R&D Tax Credit
Wages included in the ERC calculation may not also be treated as qualified research expenses (“QREs”) in computing the research credit.
Qualification
Employers may qualify for the ERC in the second, third, or fourth quarters of 2021 based on declines in gross receipts in the first, second and third quarters of 2021.
Industry Insight
Private Equity Funds are often passive investment vehicles that break aggregation among brother-sister portfolio companies.
Therefore the portfolio companies owned by these funds may not have to be aggregated in computing the number of employees or applying the gross receipts test.
Law Firms may qualify for ERCs due to court closures and jury trial restrictions in 2020 (under the government mandate test).
Tax Exempt Entities are not subject to the same controlled group aggregation rules as taxable entities. These employers cannot reduce gross receipts by the basis of assets in applying the gross receipts test.
Government Contractors may be required to return the benefits of the ERC to the government to the extent employer wages are funded by time and material contracts with the government.
Cherry Bekaert’s ERC Team
- The team has helped more than 650 employers explore their ERC eligibility.
- We have identified over $140 million in employee retention credits.
- We have worked with more than 400 employers to file multiple ERC claims.
- We use our proprietary technology platform to provide each client with an audit-ready deliverable.
For more information about claiming ERC credits, contact your Cherry Bekaert professional.