If you have not heard of the ERC, you’re not alone, as many employers aren’t aware of the credit because they initially didn’t qualify for it. When this credit was originally enacted through the CARES Act, PPP recipients were prohibited from participating. However, this restriction was lifted on December 27, 2020 through the Consolidated Appropriations Act of 2021 (“CAA”), potentially opening the ERC up to over a million more employers.
Employers can qualify by either:
Almost every state government enacted a shutdown of elective surgeries which could result in certain healthcare providers qualifying for the ERC, even in the event they do not meet the gross receipts reduction. For example, Governor Charlie Baker signed an executive order prohibiting all elective surgeries in the Commonwealth of Massachusetts from March 18, 2020 through May 18, 2020. Other qualifying examples could include reductions in patient visits due to capacity restrictions, or closing an office to meet sanitation requirements. Healthcare providers that feel they may have experienced a partial impact due to COVID-19 should thoroughly review their eligibility for the ERC.
The reduction in gross receipts qualification is dependent on whether an employer is looking to qualify for the 2020 or 2021 ERC. In order to qualify for the 2020 ERC, a business would need to show at least a 50% reduction in gross receipts in any quarter of 2020 compared to that same quarter in 2019. Many healthcare providers did not meet this threshold, and as a result are more commonly pursuing the credit based on the suspension of operations. For 2021, however, the required gross receipts reduction to qualify is only 20% when comparing any single quarter or the immediately preceding quarter to the same quarter in 2019.
The next step after confirming qualification is calculating the credit, which is different for 2020 vs. 2021. The 2020 ERC is 50% of eligible wages and healthcare costs up to $10,000 per employee, thus up to $5,000 per employee. The 2021 ERC is 70% of eligible wages and healthcare costs up to $10,000 per employee per quarter, thus up to $7,000 per employee per quarter or $28,000 for the entire year. For example, a practice with 50 employees could qualify for up to $1,650,000 of ERC between 2020 and 2021. It’s important to note that the definition of eligible wages is different for those who are considered “large employers” under the ERC, as these employers are only able to receive a credit for wages paid to employees not providing services. The definition of a large employer for the 2020 ERC is any employer that averaged more than 100 full-time employees during 2019. For the 2021 ERC, large employers are those that averaged more than 500 full-time employees during 2019.
To claim the credit, eligible businesses can withhold required deposits for certain payroll taxes – credits in excess of the businesses’ quarterly liability could either request a refund or a credit to be carried forward on their original, timely filed quarterly 941. For those businesses who have determined their eligibility after the original filing of the Form 941, an amended payroll tax return would be required to be filed, which would include a request for a refund for the credit amount.
The calculation of the employee retention credit can be complex, especially when considering the period of eligibility, overlap with other federal programs and determining which wages are deemed eligible for the ERC.
Author: Dave Leroux, CPA, MSA