What Is the Employee Retention Credit?

The Employee Retention Credit (ERC) is a refundable payroll tax credit that was first introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March of 2020. The Brewers Association hosted a webinar on this portion of the ERC that could be helpful to anyone looking to learn more about the program.

The rules of the program have been modified several times by the Consolidated Appropriations Act (CAA) of 2021, the American Rescue Plan Act (ARPA), and the Infrastructure Investment and Jobs Act (IIJA). Interpretation of the rules has been refined by numerous Internal Revenue Service (IRS) notices, Q&A’s, and other publications. Many breweries may be unaware of the latest updates, which may provide further opportunities to claim valuable payroll tax credits.

This credit can provide substantial financial support for breweries impacted by mandated restrictions of business due to COVID-19. Breweries should talk to a Certified Public Accountant (CPA) or payroll provider to see if their business qualifies for any ERC.

How It Started

Under the CARES Act, qualifying employers were eligible to claim a credit of 50% of “qualified wages” paid between March 13, 2020 and December 31, 2020, up to a maximum of $10,000 per employee for calendar year 2020.

What Has Changed

The CAA expanded the ERC into the first two quarters of 2021, with important modifications. Eligible employers could now claim an ERC of up to 70% of “qualified wages” up to $10,000 per employee per quarter.

Subsequently, the ARPA further expanded the ERC to allow eligible employers to claim the credit for the third and fourth calendar quarters of 2021. The act also introduced the “Recovery Startup Business” which is an employer who began operations after February 15, 2020 that were forced to shut down due to a governmental order. These businesses were eligible for an ERC of up to $50,000 per quarter. Further, the ARPA extended the IRS audit statute of limitations to five years for the third and fourth calendar quarters of 2021.

The last significant modifications came from the IIJA, which scaled back the ERC. The act removed the fourth quarter of 2021 from eligibility except for a “Recovery Startup Business.” Additionally, the IIJA modified the definition of “Recovery Startup Business” to mean an employer that began a trade or business after February 15, 2020 and has average annual gross receipts of less than $1 million.

The Current State

Generally, the ERC is available for the first calendar quarter of 2020 through the third calendar quarter of 2021 for most employers. The credit is worth up to $5,000 per employee for 2020 and up to $21,000 per employee for 2021.

Employers should file an amended payroll tax return to claim the credit. Note that this filing must be made within three years of the initial filing due date.

What Else Do I Need to Know?

For federal income tax purposes, the ERC refund is not taxable when received, however, wages equal to the amount of the ERC are not allowed to be expensed. This means that an employer that claims the ERC may need to amend its income tax returns for 2020 and 2021, something that is often not sufficiently highlighted for credit seekers.

The IRS also released guidance stating that tips can be counted towards qualified wages.

Additionally, it’s important to highlight that IRS processing times can be quite long, with some refunds taking more than 18 months to receive. As such, employers should not count on the ERC as a short-term cash flow solution.

Overall, the ERC is still incredibly valuable and remains one of the last pieces of pandemic-related relief available for businesses. If you have not considered the ERC, contact an expert to discuss your options.