As much of the United States emerges from the shadow of COVID-19, many individuals and firms are beginning to see a return to normal operations. Some businesses, however, continue to experience financial performance below pre-pandemic levels. These companies may be able to get help from the Employee Retention Credit (ERC), established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and later modified by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act).
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What is the Employee Retention Credit?
As its name suggests, the Employee Retention Credit (ERC) is a refundable tax credit that a business can use to cover payroll expenses and retain employees. The ERC could be worth a maximum of $7,000 per employee per calendar quarter in 2021.
For businesses continuing to struggle due to the pandemic, the money available through the ERC could represent meaningful additional funding. But the credit isn’t limited to COVID-related financial stress. The funds are also available to Texas contractors that experienced significant disruption due to the winter storms in February, or construction businesses in Louisiana impacted by Hurricane Ida.
While the ERC as established in 2020 by the CARES Act was somewhat limited in its application — particularly due to an inability to use the credit in conjunction with Paycheck Projection Program funds — the Relief Act has significantly expanded the eligibility for the ERC in 2021.
Due to the program’s expansion beyond COVID-related stressors, the ERC has become a big deal: Just in the first week of September 2021, Whitley Penn helped over 100 companies save about $50 million. For example, with Hurricane Ida recently disrupting businesses across Louisiana, any contractors in the state who had a bad September will likely qualify them for the third quarter.
Who is eligible for the ERC?
There are two criteria that determine whether a construction business is eligible for the ERC in 2021: operational/financial hardship and company size. A construction business must meet both of the criteria in order to qualify.
1. Business interruption or decline in gross receipts
A business that experienced a suspension of business during any calendar quarter in 2021 because of governmental orders limiting commerce, travel, or meetings due to COVID-19 qualify for the ERC.
Alternatively, a company that experienced a 20% decline in gross receipts in any calendar quarter in 2021 when compared to the same calendar quarter in 2019 or the immediately preceding quarter.
- For Q1 2021, an employer may elect to compare to Q4 2020 to Q4 2019
- For Q2 2021, an employer may elect to compare Q1 2021 to Q1 2019
2. Business size
The Employee Retention Credit is designed to help small businesses — those with an average of 500 or fewer full-time employees in 2019.
Calculating the Employee Retention Credit
The ERC is calculated using the qualified wages of each full-time employee.
Employee Retention Credit = Qualified wages per employee x 70%
Qualified wages are defined as wages paid to full-time employees (FTEs) for the time that the employee is not providing services due to either a suspension in business operations or a significant decline in gross receipts. In general, wages subject to FICA taxes are a reasonable proxy for qualified wages. Employees are considered full-time if they work more than 30 hours a week or 130 hours per month.
Qualified wages include expenses that can be allocated to a qualified health plan. Finally, qualified wages for periods in 2021 covered by a second-draw PPP loan may not be used to calculate the credit due under the ERC.
Contractors can access the Employee Retention Credit for the first and second calendar quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits.
Advance payment of the ERC
Small contractors (those average of 500 or fewer FTEs in 2019) may request advance payment of the credit through Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits.
Employers who have already filed form 941s (Employer’s Quarterly Federal Tax Return) for Q1 and Q2 but wish to go back and claim the ERC for either of those quarters will need to file form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) for each applicable quarter.
There’s still time in 2021 for your small construction business to benefit from the Employee Retention Credit.
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