ERC was originally introduced as part of the CARES Act. It was introduced as a coronavirus-relief provision to help companies keep their employees on the payroll. The ERC first offsets payroll taxes and is then refunded. Employers can get a benefit of up to $5,000 per employee in 2020 and $7,000 per quarter per employee for 2021.
But how do companies qualify for the ERC program? How do you calculate the credit and what documents do companies have to submit to determine qualification? Let’s answer these common questions below.
How do Companies Qualify for ERC?
There are two distinct ways employers can qualify:
1. Revenue decline for any eligible quarter in 2020 and ‘21
For 2020, the business must have a revenue drop of at least 50 percent compared to the revenue for the same quarter in 2019. For 2021, the revenue drop should be at least 20 percent for any quarter compared to the same quarter in 2019.
2. Business impact. The business was fully or partially suspended under government orders.
This business impact test applies even if the business suffered no revenue decline but was impacted by orders Employers must examine government orders for all their locations and determine if a significant part of their business was partially or fully suspended. This process can be tedious, but a qualified consultant like alliantgroup can help.
How to Calculate the Credit?
ERC is calculated based on the business’s qualification year and the number of employees it has. Here’s how it is calculated in 2020 and 2021.
- 50 percent of the first $10,000 of qualified wages will be considered.
- That equates to a maximum of $5,000 per employee for the entirety of 2020.
- If a company had less than 100 employees in 2020 and it qualifies for ERC, all wages for each of its employees qualify for the credit during the qualification period.
- If a company has more than 100 employees, only the wages paid to employees paid for the time they were not working during the qualification period will be counted toward the credit calculation.
- In 2021, the credit was increased from 50 percent of qualified wages to 70 percent. The credit limit was increased from $5,000 for the year to $7,000 per quarter. That makes for a maximum of up to $26,000 per employee.
- Another significant change for the 2021 tax year is the increase in the full-time employee limit from 100 to 500.
- If a company’s employee size is over 500, only the paid not to work during the qualification period count for the calculation.
Information Needed to Determine Qualification
- Quarterly revenue summary
- Detailed wages by date
- Business operations and employee locations
- Quarterly payroll tax returns
- Summary of lines of business (products, services, business lines)
- Detail of wages to be paid to employees not to work
- Detail of wages used for Paycheck Protection Program (based on applicability)
Want to apply for ERC? Alliantgroup can help. Click here to connect with us.