Common Myths in 2022 About the Employee Retention Credit (ERC)

The Employee Retention Tax Credit (ERC), which first began in March 2020 under the CARES Act, is a refundable employment tax credit to help businesses with the cost of keeping staff employed through the pandemic.

Several changes have been made to the ERC over the past two years, some of which were retroactive for 2020 while others apply only to 2021. With these changes has come a good amount of confusion. The most important step a business can take is to discuss this tax credit with their tax advisor. This article will briefly touch on a few of the common myths regarding the Employee Retention Credit.

Myth #1: My business received a Paycheck Protection Program loan, so I don’t qualify

Initially, an employer could not qualify for both the ERC and the Paycheck Protection Program (PPP). The Relief Act in December 2020 changed this rule retroactively all the way back to March 27, 2020, allowing eligible employers to claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.

Myth #2: It’s too late for my business to claim the credit

If your business recovered from a “substantial decline in gross receipts” as outlined in the table above, and you didn’t previously file for the credit you may still file for a retroactive ERTC refund. Despite the expiration date of October 1, 2021, you can still take advantage of the employee retention tax credits if your business is eligible. Businesses have three years after the program ends to look back at wages paid after March 12, 2020 in order to determine eligibility.

Myth #3: I started my business in 2019, so I don’t qualify.

For businesses that started in 2019, the quarter the business began is used as the base for determining the quarterly decline, until the business reaches a year of operations. For example, a new business that started in Quarter 2 of 2019 would use that quarter as the base to determine revenue decline for either Quarter 1 of 2020 or Quarter 2 of 2020. If a business started in the middle of a quarter in 2019, an estimate of that period’s gross receipts can be used.

Myth #4: I don’t think my 2021 quarterly revenues declined enough to qualify

Guidance from the IRS has provided a few rule changes that may make it easier for employers to meet the eligibility test for the employee retention credit.

In the IRS Notice 2021-23, “Guidance on the Employee Retention Credit under the CARES Act for the First and Second Calendar Quarters of 2021” guidance is given on an alternative quarter election. This election allows businesses to look to the previous quarter to determine a revenue decline greater than 20%. For example, if revenues in Quarter 1 of 2021 had not declined more than 20% from revenues in Quarter 1 of 2019, then the business could look to the previous quarter, which would be Quarter 4 of 2020 and compare those revenues to Quarter 4 of 2019. 

In addition, a safe harbor was provided under the IRS Revenue Procedure 2021-33, allowing employers to exclude certain amounts from gross receipts solely for determining eligibility for the ERC. These amounts are:

• The amount of the forgiveness of a Paycheck Protection Program (PPP) Loan
• Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act
• Restaurant Revitalization Grants under the American Rescue Plan Act of 2021.

Connect with an Advisor

Many businesses have been quick to assume they are ineligible for the ERC. If a business believes they may qualify for the Employee Retention Credit, it is important to speak to a tax advisor about the next steps. While claiming the credit may be complex, the Jones & Roth tax team has helped many businesses discover that they are eligible and helped them take advantage of this opportunity. For more information, connect with a Jones & Roth Advisor.

Employee Retention Credit Rules for Small Employers

	2020 ERC	2021 ERC
Number of Credits	1 Credit	3 credits (1 credit per quarter for Q1-Q3)
Small Employer Definition	Fewer than 100 full time employees in 2019 calendar year	Fewer than 500 full time employees in the 2020 calendar year
Credit Type	Refundable Payroll Tax credit to Eligible Employers	Refundable Payroll Tax credit to Eligible Employers
Credit Applicability	Qualified Wages Paid after Mar. 12, 2020 and on or before Dec. 31, 2020	Qualified Wages Paid after Dec. 31, 2020 and on or before Sept. 30, 2021 (exception: extended to on or before Dec 31, 2021 for “recovery startups”)
Qualified Wages	50% of Qualified Wages, which are capped at $10,000 per employee per year	70% of Qualified Wages, which are capped at $10,000 per employee per quarter
Maximum  Credit Amount	Up to $5,000 per employee per year	Up to $7,000 per employee per quarter (up to $21,000 per employee per year)
Eligibility:	The business must be in the private sector or a tax-exempt organization encountering in 2020 or 2021: · A full or partial shutdown of operations because of government limits on commerce during COVID-19 or · Quarterly revenue decline of 50% or more in 2020 when compared to the same quarter in 2019.	The business must be in the private sector or a tax-exempt organization encountering in 2020 or 2021: · A full or partial shutdown of operations because of government limits on commerce during COVID-19 or · Quarterly revenue decline of 20% or more in 2021 when compared to the same quarter in 2019.