Below is a brief summary of the ERC rules for 2020 and 2021, which includes clarifications provided by IRS Notice 2021-23. For additional guidance on this credit see the IRS FAQs.
2020 Employee Retention Credit Summary
Entity qualifies if:
- Shut down or had their business operations partially suspended, or,
- If entity has less than 100 FTEs in 2019, ALL wages during the qualifying quarters for ERC would be eligible for the credit. Even if the employee was continuing to work. If entity has MORE than 100 FTEs in 2019, only the wages paid to an employee during the qualifying quarters for ERC NOT to work are eligible for the credit.
- The credit is 50% of qualifying wages. Qualifying wages are capped at $10,000 per employee per year.
2021 Employee Retention Credit Summary
Entity qualifies if:
- Shut down or had their business operations partially suspended, or,
- They meet a 20% decline in gross receipts test.
- For Q1 2021: Q1 Gross Receipts must be <80% of Q1 2019 OR you can elect to compare Q4 2020 to Q4 2019 instead.
- For Q2 2021: Q2 Gross Receipts must be <80% of Q2 2019 OR you can elect to compare Q1 2021 to Q1 2019 instead.
- This has now been extended through Q3 and Q4 of 2021 and it’s expected the methodology for gross receipts comparison will be the same (without the prior quarter election option).
- If entity has less than 500 FTEs in 2019, ALL wages during the qualifying quarters for ERC would be eligible for the credit. Even if the employee was continuing to work. If entity has MORE than 500 FTEs in 2019, only the wages paid to an employee during the qualifying quarters for ERC NOT to work are eligible for the credit.
- The credit is 70% of qualifying wages. Qualifying wages are capped at $10,000 per employee per quarter.
Affiliate Aggregation Rules
Entities with common ownership of 80% or more are treated as one entity for purposes of the gross receipts test. So you must combine all such entity’s gross receipts to see if they meet the 50% or 80% test. If the affiliated group meets the test, every entity within that group can take the credit even if they would not have met the test on their own. Be aware: if aggregated entities share common employees, the eligible wages are still capped at $10,000 per employee either per year for 2020 or per quarter for 2021. If the same employee was paid $10,000 each by two aggregated entities, each entity couldn’t claim a full credit for the employee, because the aggregate wages would be $20,000 (in excess of the $10,000 per employee cap).
No Overlapping for Eligible Wages
- There cannot be any overlap in qualifying wages between the ERC and expenses used to qualify for PPP forgiveness.
- There cannot be any overlap in qualifying wages between the ERC and the employer credit for paid family and medical leave.
- An employee cannot be included for purposes of the ERC for any period that an employer is allowed a work opportunity credit with respect to the same employee.
Qualifying Wages
- Severance payments made to a former employee following termination are not qualified wages.
- Wages exempt from Social Security and Medicare taxes are not qualified wages.
- Wages paid to related individuals are not qualified wages. A related individual is any employee who has any of the following relationships to the employer, or to an individual owning more than 50% of the entity:
- Child, or descendant of a child
- Bother, sister, stepbrother, or stepsister
- Father or mother or an ancestor of either
- Stepfather or stepmother
- Niece or nephew
- Aunt or Uncle
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
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