Nine Important Considerations for Employee Retention Tax Credit Eligibility: Part 1

Employers across the country, even those that received Paycheck Protection Program (PPP) loans, are claiming Employee Retention Tax Credits (ERC) of thousands of dollars. Some are even claiming an ERTC of $1 million or more. Unfortunately, many employers are unaware of the ERC or even mistakenly assume that they aren’t eligible. In part one of this series (read part two here), MP’s HR and payroll experts share five important considerations for employers about this substantial pandemic aid program.

1. The ERTC eligibility criteria differ for 2020 and 2021.

While employers may claim an ERC credit retroactively, eligibility criteria vary between the two years. The revenue loss requirement for 2021 eligibility is less stringent than it is for 2020. This flexibility widens eligibility for employers, even as governmental restrictions diminished and states have proceeded with re-opening. Another factor that changes from 2020 to 2021 is the employee count threshold for “large employer status.” Large employer status dictates eligibility and the amount of ERC funds an employer is able to claim.

2. Employer size dictates the ERC claim amount.

For the 2021 ERC criteria, the threshold determining “large employer” status increased from 100 to 500 employees in the company payroll system (based on 2019 full-time employee counts). This change makes it easier for many employers to claim higher ERCs in 2021.

• Large employers: may only claim ERC credit on monies paid to employees who were not providing services. These monies could be paid to employees on furlough, leave, etc. They may include health insurance costs, life insurance costs, or other benefits.
• Small employers: may claim ERC on wages of all employees, including those that were or are actively working during the quarter in question.

3. Employers calculate the loss of revenue through “gross receipts.”

When calculating revenue loss to claim an ERC, employers must use the gross receipts of the taxable year. Gross receipts include:

• sales
• payments for services
• income from investments
• income from incidental or outside sources
• interest
• dividends
• rents
• royalties
• annuities

4. A “suspension of operations” looks different for every employer.

Some employers may have experienced a complete shutdown during portions of the pandemic. Others may have experienced restrictions on their hours, while some employers may have had challenges with their supplier chain. Employers may be eligible to claim an ERC based on various scenarios. HR services experts like MP assist many companies in determining eligibility.

5. ERCs are often reduced by restrictions on owner compensation.

When claiming an ERC, employers may count the wages of the owners who own less than 50% of the business. However, employers cannot claim the wages or salaries of owners who own 50% or more of the business. Additionally, employers cannot claim the wages of individuals related to these owners of 50% or more of the company. These relatives could include:

• A child or grandchild
• A brother, sister, or stepsibling
• A father, mother, or stepparent
• A niece or nephew
• An aunt or uncle
• A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.