In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the Employee Retention Tax Credit, which was part of the CARES Act, and how eligible businesses can receive free money for having employees.

As we all know, the COVID-19 pandemic has had a serious impact for businesses across the country. The CARES Act, along with the Payroll Protection Program (PPP). has helped alleviate some concerns. Additional legislation has been enacted to help out as well. If you are unaware, there is a way eligible businesses can receive free money for having employees. In this episode of Adam Talks, Mr. Bergman will discuss who is eligible, and how much you may receive.

Legislation to Help Business Owners

As part of the CARES Act, the Employee Retention Credit (ERC) was there to help small business owners who did not shed payroll. It was an effort to keep more Americans employed during the onset of the pandemic. However, if a business received a PPP loan, it was not eligible for this credit. The credit, which was expended and extended by the Consolidated Appropriations Act of 2021 (CAA), gave the business owner a tax credit based on the number of employees and their salaries.

The CAA allowed for businesses who received a PPP loan to also get the tax credit. The only exception is payroll paid by the forgivable PPP loan. Further, it increased businesses who may receive the loan, from those with up to 100 employees, to include businesses which had up to 500 employees.

The American Rescue Plan Act of 2021 (ARPA) has gone a step further for the last two quarters of 2021 and then some. Under the Act, the business needs to only have a 20% drop in gross sales, as opposed to 50% for the original credit. The credit rate is up to 70% (from 50%). Further, the maximum qualified wages is $10,000 per quarter, and not for the entire year.

For 2021, the maximum amount of the credit for each employee is $28,000, which is way up from the $5,000 of the original ERC.

You can download a PDF from the IRS website about the ERC: Notice 2021-20 PDF for 2020 and Notice 2021-23 for Jan-Jun 2021.

Who is Eligible?

The first requirement is that one must have had an eligible “trade or business during the quarter for which the credit is determined by the CARES Act.” Further, you must satisfy one of two conditions. First, a suspension of operations due to governmental order. Secondly, a significant decline in gross receipts.

We’ve all gotten to know the difference between essential and nonessential businesses over these last 18 months or so. The credit works a little differently based on your type of business.

Nonessential Businesses

At the onset of the pandemic, the US went on lock-down, shuttering the doors of virtually all nonessential businesses. Many businesses could not function because of this. However, there were others who could work remotely. For example, IRA Financial could continue its operations via “telework.” Because of this, the business was not eligible for the credit.

However, for the thousands of businesses that needed to enact their trade in person, this was not an option. Many businesses were able to adapt to perform certain activities away from the workplace. This is the definition of “a partial suspension of operations due to the governmental order.”

Essential Businesses

On the other hand, most businesses deemed “essential” were allowed to remain open. These businesses are not to be considered to have a suspension of operations. However, there are ways to receive the credit and receive free money for having employees.

If a “nominal” portion of the business must cease, there may be a partial suspension to to governmental orders. For example, an essential business may also do a considerable amount of nonessential functions. Also, if the business must close during normal operating hours, it may be considered as having a partial suspension.

Decline in Gross Receipts

The other factor of determining eligibility for the tax credit is the loss of business quarter over quarter. To figure out when you had a significant decline in gross receipts for 2020, you need to determine when you had a 50% decline in 2020 compared to the same quarter in 2019.

The length of this period either ends on January 1, 2021 or the next calendar quarter after the quarter in which your 2020 gross receipts are more than 80% of the receipts for the same quarter in 2019. Basically, once you hit the 50% threshold, you will be eligible for the credit until your gross receipts are up to 80% of the 2019 quarter total. Obviously, if you never hit that 80%, you are eligible until the last quarter of 2020.

It’s important to note that this credit is not available to the self-employed. However, if you paid wages to other employees, you may qualify for the tax credit on those wages only.

How Much Free Money can You Receive?

For 2020, the maximum credit you can claim is $5,000 per eligible employee. This is determined by a 50% credit of up to $10,000. The qualifying period to be considered is determined as above (based on the loss of gross receipts).

For 2021, the credit is 70% of up to $10,000 for each of the first two calendar quarters of the year. This begins on January 1st and ends on June 30, 2021. This means you can receive a tax credit of up to $14,000 for each employee.

This credit will be applied to the Social Security you pay into for each employee. It will be seen as an over-payment and is fully refundable!

Lastly, the ARPA expands benefits to the final two quarters of this year. The Employee Retention Credit is now available to “Recovery Startup Businesses.” If you opened a business after February 15, 2000 and have less than $1 million in annual gross receipts, you may be eligible for the ERC. The credit is limited to $50,000 per quarter, and you do not have to meet the decline in gross receipts.

Next, there is an expanded benefit to “Severely Financially Distressed Employers.” If an employer suffers a 90% decline in gross receipts from the same quarter in 2019, you will get more free money for having employees.

Conclusion

If you are a business owner who has been impacted by the COVID-19 pandemic, you may be eligible to receive more free money for having employees. The original credit was put in place to help those who had to shutter their doors for a long period of time. New legislation this year has expanded those benefits. You may be eligible and not know it! Be sure to consult with a professional to see if you may be missing out on this tax credit.

Thanks for listening! If you or someone you know is a business owner, this may potentially save you thousands of dollars. Be sure to share with everyone you know! While, you’re at it, don’t forget to check out our SoundCloud page for all 300+ episodes of Adam Talks!