Local restaurant owners serve a very important purpose in their communities, but as we all know, they faced some really difficult challenges during the pandemic. According to the National Restaurant Association, 110,000 eating and drinking establishments in the U.S. closed for business—temporarily or permanently—in 2020 alone. Nearly 2.5 million jobs were lost from pre-pandemic levels and restaurant/foodservice industry sales fell by $240 billion from an expected level of $899 billion.
The Employee Retention Credit (ERC) was created through the CARES Act to assist small businesses, like mom and pop restaurants, that were negatively affected by the pandemic. Although it expired at the end of 2021, many people do not realize the program expanded eligibility for the refund, allowing them the ability to retroactively claim ERC. Businesses now have up to three years from the end of the program to file for up to hundreds of thousands—if not millions— of dollars in reimbursements.
As one of the industries to be hit hardest by the pandemic with many businesses still on an uphill climb to recovery, those who need this relief need to know if they are eligible and how to apply.
What is the Employee Retention Credit?
The Employee Retention Credit is a payroll tax refund that was created by the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020. It is a refundable payroll tax credit for wages paid by an employer whose business was either fully or partially suspended due to the COVID-19 pandemic or experienced at least a 10 percent decline in gross receipts compared to the previous year.
The ERC is a quarterly tax credit against the employer’s share of certain payroll taxes. The credit is 70 percent of the first $10,000 in wages per employee in each quarter of 2021. That means this credit is worth up to $7,000 per quarter and up to $28,000 per year, for each employee. This applies to wages that were paid or incurred from March 13, 2020 through December 31, 2021. The cost of employer-paid health benefits can also be considered part of the employees’ qualified wages.
The ERC was extended by the Consolidated Appropriations Act (CAA), enacted in December 2020, and the American Rescue Plan Act (ARPA), enacted in March 2021, so businesses could file for certain advance payments of the credits through the end of 2021. The ERC program date was extended retroactively for most businesses through the signing of The Infrastructure Investment and Jobs Act on November 15, 2021.
Who is eligible for the ERC?
Most employers, including restaurants, following the enactment of the American Rescue Plan Act, can qualify for the credit. In fact, over 80 percent of businesses that apply qualify. The business must have 500 or fewer employees and have kept their employees on the payroll.
Qualification to receive the ERC is determined by the following factors for eligible employers: (1) The business was fully or partially shut down due to a governmental order during any part of the quarter, or (2) The businesses’ gross receipts in a quarter declined more than 20 percent compared to either (a) the same quarter in 2019 or (b) the immediately preceding quarter in 2020 or 2021. In the event of either scenario and the business had 500 or fewer employees, then any wages paid in the quarter may count towards the credit amount.
Any restaurant owner that experienced a 50 percent or greater decline in gross receipts can receive 80 percent credit of wages paid up to the maximum. Eligible employers with 1,500 or fewer full-time employees may claim the credit on all wages paid to their employees. All other eligible employers may claim the credit only for wages paid to employees who are furloughed or for the time the employees are not working.
Qualifications were expanded by The Consolidated Appropriations Act to include businesses who took a loan under the Paycheck Protection Program (PPP) during the pandemic, including borrowers from the first round of PPP who originally were ineligible to claim the tax credit.
The ERC is also available for the last two quarters of 2021 for certain small businesses that opened after February 15, 2020. These businesses, if they have less than $1 million in annual gross receipts, may claim ERCs of up to $50,000 per quarter, even if the businesses have not been shut down or experienced declines in revenue.
How do I claim my credit?
On March 1, 2021, the IRS issued a notice that provides guidance for employers claiming the Employee Retention Credit. However, the notice only provides guidance for the credit as it applies to qualified wages paid between March 12, 2020 and Sept. 30, 2021. The IRS notice also includes examples with scenarios of how an employer with a PPP loan determines which wages are eligible for the tax credit.
In order to retroactively claim the credit for past quarters, eligible employers need to report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns. This is done through the Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the applicable quarters in which the wages were paid.
The impacts that COVID-19 had on small businesses, especially the restaurant industry, will still be seen for years to come. Many restaurant owners are still fighting an uphill battle to get back to where they were pre-pandemic and need the necessary funds to do so. That is why it is crucial for them to not only be aware of the retroactive payments through the ERC, but also whether or not they are eligible and how to apply.
Since its inception, the ERC allowed 60 million American workers to remain at their jobs and continue receiving paychecks and benefits during the crisis—40 million of which were employees of small and mid-sized businesses. With retroactive payments available, there are many more businesses, including restaurants, that have the potential to reap the benefits of the program to save their business.
Howard Makler, founder and CEO of Innovation Refunds began his career starting Howie’s Game Shack, which pioneered eSports offering 1000 PCs and Xboxs all networked together for in-store competitions. Since then, Howard has founded and operated multiple other small businesses, including clean energy, fintech, and retail organizations. Today, he is focused on growing Innovation Refunds to help as many small businesses as possible, educating owners and service providers to receive the payroll tax credit.