The Employee Retention Credit (ERC) was instituted in 2020 to make it easier for employers to keep their employees, despite all the challenges presented by COVID-19. The ERC can be a significant reward for qualified businesses. For those that are eligible to receive the ERC and are qualified for the R&D Credit, it is important to understand how the two credits are connected.
The ERC is a fully refundable payroll tax credit, calculated using wages, health plan expenses paid or incurred by an employer, and pre-tax employee contributions. There are 2 ways a business may qualify:
- An employer had their operations either fully or partially suspended due to COVID-19
- Or an employer showed a decline in gross receipts during any calendar quarter in 2020 and 2021 as compared to the same period in 2019.
We’ve created a table to show a breakdown:
|2020 Qualification Mar 13 - Dec 31||2021 Qualification Jan 1 – Sept 30
|Employers who had at least 50% reduction in gross receipts for the current calendar quarter as compared to the same calendar quarter in 2019.||Employers who had greater than 20% reduction in gross receipts for the current calendar quarter as compared to the same calendar quarter in 2019.
|100 or fewer full-time employees in 2019 – credit applies to wages paid to all employees|
100 or more – credit applies to time employees were not providing service.
|500 or fewer full-time employees in 2019 - credit applies to wages paid to all employees
500 or more – credit applies to time employees were not providing service.
|Credit is equal to 50% of qualified wages, up to $10,000 annually, per employee. ||Credit is equal to 70% of qualified wages, up to $10,000 for all quarters per employee.
In addition, if a business began its services after February 15, 2020 (a Recovery Start Up), they may be eligible for the same ERC credit as those who qualify for the 2021, in Q4, if they had an average of $1 million or less in gross receipts.
With wages being a component of the R&D Credit as well, there is some overlap taxpayers should consider. If a company is eligible to claim both the R&D Credit and the ERC, wages used in determining a taxpayer’s 2021 ERC cannot be included in determining qualified wages for the R&D Credit.
- Employee earning $60,000 per year has 75% of their time determined as qualified for the R&D Credit. Company could use $45,000 of that employee’s wage towards qualified wages for the R&D Credit.
- If claiming the ERC as well, it would be more beneficial to use the first $30,000 of wages ($10,000 x 3 quarters) towards the ERC, leaving only $30,000 of that employee’s wage available for the R&D credit, instead of $45,000.
It is critical to identify any overlap of wages between these two credits, and not include the same share of wages. For companies eligible to benefit from both the ERC and R&D Credit, it’s important to have a strategy to maximize their total available credits.
If there are questions about qualifying for the ERC, how to navigate the process, and how it impacts your R&D Credit, you can connect with a Hull & Knarr expert by clicking here.