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An Overview Of The ERC Gross Receipts Test (2020 and 2021)

May 15, 2024

You’re likely familiar with the Employee Retention Tax Credit (ERC), either because you’ve heard about lucrative payouts or you’ve seen or heard an ad about it. The ERC is a refundable payroll tax credit that was introduced in the CARES Act in 2020 and subsequently updated by the Taxpayer Relief Act, the American Rescue Plan, and the Infrastructure and Jobs Act. There are two ways to qualify for the ERC, including the gross receipts test and the suspended operations test. While we’ve already covered the suspended operations test, I’m going to cover the ERC gross receipts test in this article.

What is the ERC gross receipts test?

The ERC gross receipts test is the most straightforward way to qualify for the Employee Retention Tax Credit though the specific definition of “decline” is different for 2020 and 2021.

For 2020, you can qualify for the ERC if your gross receipts for any quarter decreased by at least 50% when compared to the corresponding 2019 quarter.

In 2021, you can qualify for the ERC if your quarterly gross receipts decreased by 20% or more when compared to the same quarter(s) in 2019.

What are gross receipts under the ERC gross receipts test?

The IRS defines gross receipts as “the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses.”

Gross receipts generally include the following types of income:

  • Sales of goods
  • Provision of services
  • Other income-producing assets or activities
  • Rental income
  • Sale of capital assets
  • income from interest and dividends

There can be nuances in the definition of gross receipts at the state level so be sure to consult with your accountant to determine whether other income not listed above is included in your company’s gross revenue.

ERC wages interaction with PPP loans, SVOG grants, and similar funding

The IRS’ Revenue Procedure 2021–33 specifies that Shuttered Venue Operator Grants, Restaurant Revitalization Funds (RRF), and similar loans may not be counted as gross income when determining eligibility for the ERC. Also, PPP loan recipients may still claim the ERC as long as the wages used to qualify for the PPP are not included in the ERC calculations.

Additionally, IRS Notice 2021–23 and IRS Notice 2021–49 both explain that qualified wages may not be calculated using wages connected to the following:

  • Loans described in Small Business Act section 7(a)(37) or 7A, which includes wages connected to a first or second draw Paycheck Protection Program (PPP) loan
  • Grant covered under section 324 of Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
  • A restaurant revitalization grant (American Rescue Plan Act section 5003)

The alternative quarter election rule

In Notice 2021–23, the IRS describes how employers that did not exist in 2019 may use corresponding 2020 quarters to qualify for 2021 quarters. For example, under the alternative quarter election rule, you can compare the second and third quarters of 2021 to the second and third quarters of 2020, instead of 2019. If there is a qualifying revenue decline of 20% or more, you are considered an eligible employer for the ERC.

Notice 2021–49 also extends the alternative quarter election rule to businesses that qualify as a “severely financially distressed employer.” According to the IRS, a “severely financially distressed employer” experiences a decline of 90% or more in any 2020 or 2021 quarter when compared to the corresponding 2019 quarter. Severely financially distressed employers that did not exist in 2019 may alternatively compare the corresponding 2020 quarter.

Calculating qualified wages for the Employee Retention Credit

Once you’ve determined that you’re eligible for the ERC under the gross receipts test, you can start figuring out your qualified wages.

Here are the steps to calculate your qualified wages for the ERC:

  • Determine if you qualify, based on ERC suspension or gross receipts decline.
  • Calculate the number of qualified employees or full-time equivalents in 2020 and 2021
  • Apply the appropriate percentage to each qualifying employee’s wages and qualified health expenses
  • Add up the resulting percentages to obtain your total amount of qualified wages

Which wages are countable as qualified wages?

Generally, you can count any wages subject to FICA taxes, as well as qualified health expenses, that were paid between March 12, 2020 and September 30, 2021 (for Recovery Startup Businesses, this ending period if December 31, 2021).

Qualified health expenses typically include only the employer and the employee’s pre-tax portion, not any after-tax amounts.

Defining qualified employees for the ERC gross receipts test

When you’re determining your qualified wages, remember to count the wages of qualified full-time employees. The IRS defines a qualified “full-time employee” as follows (IRS Notice 2021–49):

“The term ‘full-time employee’ means an employee who, concerning any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service during the month (emphasis added).”

Once you’ve determined your company’s number of qualified employees in 2020 and 2021, it’s time to determine the amount of qualified wages you can use to determine your potential ERC amounts.

Percentage of qualified wages for 2020 and 2021

IRS Notice 2021–49 clarifies that tips can be included in qualified wage calculations if they are subject to FICA. If an employee’s tips exceed $20 in a calendar month, the total tip amount for that month can be included when calculating qualified wages. On the other hand, if an employee’s total tips for a calendar month are less than $20, they are not subject to FICA and would consequently not be countable for the ERC.

Can I include owner or spouse wages in qualified wages?

The IRS FAQs about the ERC (FAQ #59) specifies that wages for individuals related to the majority owner cannot be included in qualified wages.

Related individuals include:

  • Child or a descendant of a child
  • Brother, sister, stepbrother or stepsister
  • Father or mother, or an ancestor of either
  • Stepfather or stepmother
  • Niece or nephew
  • Aunt or uncle
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law

Notice 2021–49 specifies that, if an individual is considered a majority owner, their wages cannot be included in qualified wages for the ERC. The owner-spouse rules for qualified wages apply to all quarters in which the ERC is available.

How to claim the Employee Retention Tax Credit

The Employee Retention Tax Credit program officially ended on September 30, 2021 for all businesses except for Recovery Startup Businesses. However, you can amend your payroll tax return for any ERC-eligible quarters for up to 3 years from the date you filed your original payroll return.

The deadlines for retroactively claiming the ERC using an amended payroll tax return (Form 941-X) are:

  • April 15, 2023 for the second, third, and fourth quarters of 2020
  • April 15, 2024 for all 2021 quarters

Contact MBS Accountancy for ERC Assistance!

We’d love to help you explore your ERC eligibility and claim it for your business. Since the ERC was announced in 2020, we’ve helped our eligible clients claim it for their businesses and use it to revitalize their operations and recover after COVID-19. You can contact us to learn more about our ERC services. Here are a few recent results:

  • A sports shop qualified for the first quarter of 2021 and received $58,255 in ERC.
  • A hotel brand qualified for the second, third, and fourth quarters of 2020 and the first two quarters of 2021, and received $484,948.99 from the ERC.
  • A recreation venue qualified for the second, third, and fourth quarters of 2020 and received $360,384.26 in ERC.