Qualifying Criteria for the Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) is a tax credit introduced by the CARES Act to help eligible employers retain their employees during the COVID-19 pandemic. It provides financial relief to businesses that were significantly impacted by the crisis. However, not all employers may qualify for this credit. There are certain criteria that need to be met in order to be eligible for the ERC.

Eligible Employers

In order to be eligible for the ERC, an employer must fall into one of the following two categories:

1. Businesses that were fully or partially suspended by a government order due to the COVID-19 pandemic. This means that the government mandated closure or restriction significantly impacted the employer's operations.
2. Employers who experienced a significant decline in gross receipts. For 2020, this means a decline of 50% or more when compared to the same quarter in 2019, and for 2021, a decline of 20% or more.

Employee Count

The number of employees an employer has also plays a role in determining eligibility. The criteria are as follows:

• For employers with an average of 100 or fewer full-time employees in 2019, all wages paid to employees during the ERC-eligible period are eligible for the credit, regardless of whether they are providing services or not.
• For employers with more than 100 full-time employees in 2019, only wages paid to employees who are not providing services due to the suspension or reduction in business operations are eligible for the credit.

Qualified Wages

The Employee Retention Credit is calculated based on qualified wages paid to eligible employees. Qualified wages are determined as follows:

• For employers with an average of 100 or fewer full-time employees in 2019, all wages paid during the ERC-eligible period are considered qualified wages.
• For employers with more than 100 full-time employees in 2019, only the wages paid to employees who are not providing services due to the COVID-19 pandemic are considered qualified wages.
• The maximum amount of qualified wages that can be taken into account for any employee is $10,000, including health plan expenses.

Claiming the Credit

In order to claim the Employee Retention Credit, eligible employers need to report their total qualified wages and the related credit for each quarter on their employment tax returns.

For employers who have received the Paycheck Protection Program (PPP) loan, it's important to note that they are not eligible to claim the ERC for the same wages used to justify PPP loan forgiveness. However, wages that were not considered in calculating the PPP loan forgiveness amount can still qualify for the ERC.

Disclaimer

This article is for informational purposes only and should not be considered as legal or tax advice. Employers should consult with their tax advisors or legal professionals to determine their eligibility and claim the Employee Retention Credit.