Employee Retention Credit (ERC)

The Employee Retention Credit is a fully refundable credit against an employer’s payroll taxes for wages paid from March 12, 2020 through December 31, 2020. However, this is not an advance of funds so may not help cash strapped businesses. This credit is not available to businesses that have accepted PPP or EIDL loans.

Self-Employment taxes are NOT currently eligible for this credit.

The amount of this credit is 50% up to a maximum of $10K in wages per employee or $5K per employee.

However, there are two criteria:

• The business must be either partially or fully shut down in any calendar quarter in 2020 due to Federal, State or Local restrictions
• Experience a decline in revenue of more than 50% compared to same calendar quarter in previous year. The business will continue to be eligible until quarterly revenue exceeds 80% of quarterly revenue from the same quarter in 2019.

The ERC appears to be available for each quarter that the criteria is maintained through the end of calendar year 2020.

The criteria in place may be inequitable in in certain circumstances. If for example if a business’s revenues are down 45% from the year before, they would not be eligible. On the other hand, a business that only experienced a 10% decline but was a business partially shut down by a local government WOULD be eligible.

In most cases the PPP will be the best option however if a business has had to lay off employees and does not anticipate being able to rehire them soon enough to disqualify PPP loan forgiveness and where employee salaries are relatively modest the ERC option may make sense.

If there is a situation where the ERC nets a better outcome, businesses may consider trying to secure a non-SBA loan to cover costs in the interim, which would not affect ERC eligibility.

Below is an excerpt from https://www.kitces.com/blog/economic-injury-disaster-loans-eidl-payroll-tax-breaks-paycheck-protection-program-ppp-cares-act/. It does a good job of highlighting a situation where the ERC tax credit might be a better option than the PPP loan.

Example #3: Dave’s Delightful Diner is a small business located in an area that has been hit hard by the COVID-19 crisis and is partially shut down (delivery only) as a result of government orders during Q2 and Q3 of 2020. Prior to the Q2 2020, Dave’s Delightful Diner employed 30 workers, who each made $36,000.

However, as a result of the crisis and the inability to serve customers ‘in-house’, the restaurant currently only employs 10 workers, who each continue to earn $36,000. Furthermore, Dave’s Delightful Diner does not anticipate a change in employee headcount before mid-Q3 2020, at the earliest.

The maximum loan available to Dave’s Delightful Diner under the PPP program would be 30 x ($36,000 / 12) x 2.5 = $225,000. Sounds pretty good, right?

But as we begin to impose the restrictions on loan forgiveness under Section 1106 of the CARES Act, that loan begins to look a lot less attractive.

Consider, for instance, the at the current employee level, Dave’s Delightful Diner will have only 10 x ($36,000 / 52) x 8 = $55,384.62 of payroll cost during the first 8 weeks after the PPP loan is received. But remember, Dave’s Delightful Diner has also cut payroll by two-thirds, which means the amount spent on otherwise forgivable expenses must be reduced by two-thirds as well!

As a result, the most ‘free money’ from a PPP loan that Dave’s can qualify for would be $52,384.62 / 3 = $18,461.54. Not a deal. But certainly not the best Dave’s Delightful Diner can do!

Consider, for instance, if instead of receiving a loan under the PPP, Dave’s Delightful Diner just decided to use the Employee Retention Credit to help shore up cashflow. During Q2 and Q3, total salary paid to each employee would be $36,000 / 2 = $18,000. For purposes of determining the Employee Retention Credit, however, those salaries are capped at $10,000 each.

Nevertheless, applying the 50% Employee Retention Credit on 10 worker’s salaries who each earned at least $10,000 in wages, results in a 10 x $10,000 x 50% = $50,000 Employee Retention Credit! That’s nearly three times(!) the ‘free money’ that Dave’s Delightful Diner would have received if it had forgone the Employee Retention Credit and opted for a forgivable loan under the Paycheck Protection Program.