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5 Reasons Why ERC is Worth Another Look for Payroll Tax Relief

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5 Reasons Why ERC is Worth Another Look for Payroll Tax Relief 1

If you haven’t explored the Employee Retention Tax Credit (ERC) yet, you may be missing out on up to $33,000* in payroll tax relief per employee—even if you had a PPP loan!
*UPDATE: You may now be able to claim even more payroll tax relief per employee thanks to the American Rescue Plan Act (ARP), which extends ERC through December 31, 2021. 

ERC is a payroll tax credit available to employers that experienced a significant loss of revenue or had to reduce/suspend operations due to government COVID-19 orders. If you skipped ERC in favor of a seemingly-less-complicated PPP loan in 2020, or have not used any federal COVID-19 relief programs, you may be leaving “free” money on the table! The continuation and expansion of the ERC in 2021 warrants serious consideration. With some review and planning, you may be able to claim hundreds of thousands or more in payroll support for your organization. (For example, if you have 10 employees and are eligible for the maximum credit on ERC-qualified wages paid in 2020 and the first half of 2021, you may be able to claim $190,000 in payroll tax relief!)

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Program updates that save you money!

You may be able to claim up to $33,000 in payroll tax credits per employee.

Under the CARES Act, the maximum ERC credit is capped at $5,000 in qualified wages paid per employee for the entire 2020 period, which can be claimed retroactively. 2021 ERC updates increase the maximum credit to $7,000 in qualified wages paid per employee per eligible quarter in 2021. All told, that’s a potential payroll tax credit of $33,000 per employee!

If your operations were fully or partially suspended due to governmental orders, or you experienced a significant decline in revenue, you are likely eligible to claim ERC.

You may claim ERC for qualified wages paid during periods in which operations were limited due to government COVID-19 restrictions, or your organization had a reduction in gross receipts compared to previous quarters.

Calculating the gross receipts reduction is different for 2020 and 2021 ERC:

  • 2020 ERC Gross Receipts Percentage: 50% reduction in revenue in any quarter of 2020 compared to the same quarter in 2019
  • 2021 ERC Gross Receipts Percentage: 20% reduction in revenue in Q4 2020 compared to Q4 2019; 20% reduction in revenue in Q1 and/or Q2 2021 compared to the same quarter in 2019. If your organization did not exist in 2019, you can use the corresponding quarter in 2020 to measure a reduction in gross receipts. Please Note: The American Rescue Plan (APR) enacted on March 11, 2021, revises some eligibility requirements for ERC. We are still waiting for updated guidance from the IRS to clarify the changes. Stay tuned!

Since ERC rules are ever-changing (and updated, formal guidance is lacking), we recommend visiting the IRS ERC FAQs page for details on how to determine if a quarter qualifies for ERC. Please note that the IRS is still updating FAQs per 2021 ERC revisions.

You can now retroactively claim ERC even if you had a PPP Loan or EIDL Advance.

This 2021 ERC update is a game-changer — you can claim ERC for qualified wages in 2020 even if you had a Paycheck Protection Program Loan (PPP) or Economic Injury Disaster Loan (EIDL) Advance. And you can claim ERC in 2021 with PPP and EIDL. This means even more payroll relief for small employers!

Most employers likely have enough wages to satisfy PPP loan forgiveness requirements and are eligible for ERC, especially if operations were suspended or limited due to government public health orders. However, careful accounting may be needed to show that an employer is not double-dipping and using both programs to cover the same wages (e.g., wages paid with PPP funds that were forgiven, and credits for FFCRA paid leave).  This may get complicated since the IRS definition of qualified wages for ERC is significantly different than the definition of eligible payroll expenses for the PPP Forgiveness Application.

Watch our video for an overview of 2021 updates to ERC, as well as considerations for using ERC with PPP loans

 

Setting aside that the definition of wages is different for both purposes, you have to think about time periods. For example, you have flexibility in your PPP covered period (24 weeks from when you received PPP funds), so you need to consider in which quarters you may have qualified for the payroll credit first—either from a shutdown or gross receipts decline—and use those periods for the ERC.

Also, you might have more than enough wages for PPP forgiveness even when using the same periods, so you have to carefully account for that and have documentation that the wages used for ERC are not the same wages used on your PPP Forgiveness Application.

It’s no walk in the park to analyze all these factors with PPP and ERC, but it may lead to great strides for the future of your organization. (If you’re an ASAP payroll or accounting client, we can help you determine eligibility, calculate qualified wages, and prepare appropriate tax forms. Visit our ERC Support Services page to learn more.)

If you have a PPP loan and have not yet applied for forgiveness – WAIT!
Since wages paid with PPP funds do not qualify for ERC, you should claim the minimum requirement for payroll costs (60% of PPP funds) to free up more wages to qualify for ERC.

Need money now? If you have 500 or fewer employees, you can claim advance ERC by withholding eligible payroll tax payments.

There are few times where it’s OK to not pay employment taxes, and this is one of them. Per the IRS, eligible employers can reduce federal employment tax deposits in anticipation of claiming ERC. They can also request an ERC advance for any amounts not covered by the reduction in deposits.

Of course, this is not an invitation to simply stop paying your share of payroll taxes. You will need to document, report, and certify that you are claiming credits for ERC-qualified wages. And, you need to ensure that you are not double-dipping by excluding wages for which you already received credit, such as FFCRA paid leave or payroll costs included with PPP loan forgiveness.

You can now include the employer share of healthcare costs paid to furloughed employees in ERC-qualified wages for 2020 and 2021.

ERC-qualified wages include employer-paid healthcare costs paid in 2020 and 2021 to employees even if they were not working (e.g., furloughed). Previously, ERC required that wages had to be paid in order to include healthcare costs. This opens up opportunities to review and update qualified wages with healthcare costs to increase credit amounts.

ERC FAQs

How does ERC work with payroll tax credits for FFCRA-type paid sick leave?2021-05-06T21:52:16+00:00

Wages for which you received FFCRA payroll tax credit do not count toward ERC qualifying wages. Therefore, you must deduct FFCRA-eligible wages when calculating your ERC amount.

May I still claim ERC if I have a PPP loan, EIDL, Restaurant Grant or used other federal COVID-19 relief programs?2021-05-06T21:51:34+00:00