Employee Retention Credit for Manufacturing Industry (2023)

BusinessTaxesERTC
7 min read

With an 8.5% share of the US workforce and 11.4% of the country’s economy, manufacturers are excellent candidates to claim an ERC credit of up to $26,000 per employee. This fully refundable tax credit is available to most manufacturing companies that experienced supply chain delays, full or partial shutdowns by government order, or a significant decline in gross revenues.

ERC Credit

The employee retention credit (ERC) is a refundable payroll tax credit that was introduced in the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. It was created to help companies impacted by the COVID-19 pandemic and encourage non-essential businesses to keep employees on the payroll.

With the passing of the Consolidated Appropriations Act, essential businesses and those that received Paycheck Protection Program (PPP) loans can now take advantage of ERC eligibility too.

ERC refund claims are calculated based on qualified wages paid by eligible employers to W-2 employees. For 2020, the maximum ERC tax credit is $5,000 per employee or up to 50% of qualified wages and healthcare costs with a cap of $10,000 per employee. In 2021, the tax refund amount increased to 70% of eligible wages with a cap of $10,000, or up to $7,000 per calendar quarter, per qualified employee.

How to Qualify

Manufacturing firms can claim the ERC if they were affected by common disruptions in raw materials and critical goods during the Covid-19 pandemic that caused a loss in revenue or if they received government orders or restrictions resulting in a full or partial suspension of operations.

ERC Quiz Questions

Most manufacturers can also be ERTC qualified through disruptions in supply chains or product manufacturing that caused interruption or modification of business operations. Some other qualification examples for manufacturing businesses include assembly line capacity limitations, or the inability to collaborate or work with vendors internationally or domestically. 

Gross Receipts Test

Even without supply chain disruptions, if a manufacturer experienced a significant decline in gross receipts in a particular quarter, they could be eligible to claim an ERTC credit by filing a Form 941-x with the IRS.

If their gross revenue for a quarter in 2020 is less than 50% of the same quarter in 2019, the employer is eligible for the tax credit. For 2021 claims, an eligible employer only needs to experience a 20% decline in gross receipts when comparing it against the same calendar quarter in 2019.

Governmental Orders

Manufacturers whose business operations were fully or partially suspended because of government mandates are eligible for a cash refund within the period their operations were restricted. This includes the inability to provide services or produce goods due to supplier shutdowns or a vendor experiencing a supply chain disruption that had a nominal effect on your gross receipts.

American businesses may automatically qualify for the ERC tax credit if they previously ran 24 hours a day, but a governmental order required them to reduce shift lengths to carry out mandatory cleaning procedures for worker safety. Limitations on employee capacity and social distancing that resulted in unfavorable modifications to business operations are also valid reasons to claim this credit.

Recovery Startup Business

All manufacturers who commenced operation on or after February 15, 2020, can only claim this credit as a recovery startup business with a maximum total refund amount of $100,000.

Increased Revenue

Even if your business profited during the pandemic or could not pass the gross receipt test, it will automatically disqualify your ERTC claim. A second key qualifier is simply having a significant portion of your business operations limited by a local or federal government. This includes whether these mandates directly affected your business operation or you experienced supply chain issues from a vendor that sells you a main product component.

As long as you can prove a restriction from a US government authority had a nominal effect on your business operations, then you can start taking advantage by applying for the ERC.

PPP Loans

When the ERC was first enacted, business owners who received PPP loans could not claim the employee retention credit. This limitation was since annulled, however, the same wages cannot be counted in both ERC calculations and PPP loan forgiveness. So, be careful to not double-dip ERC and PPP wages when applying for your credit.

Qualified Wages

ERTC-eligible wages only include those paid to W-2 employees from whom you withheld payroll taxes, along with healthcare/Medicare expenses.

There is also an employer designation (small or large) that is based on your full-time employee count. Only employees with an average of at least 30 hours/week are considered to work full-time, whereas there are no claim restrictions on part-time employee numbers.

Small Employers

The threshold to be considered a small employer in 2020 is 100 or fewer full-time employees, while 2021 claims also up to 500 or fewer f/t employees. If your manufacturing business is designated as a small employer, then any wages paid to employees along with their health care expenses can be claimed. The only caveat is that there is no double-dipping allowed between ERC and PPP wages or any other payroll tax credit.

Large Employers

When a manufacturing company had 101 or more full-time employees in 2020 or 501 or more employees in 2021 they would be designated as a large employer. This would restrict the qualifying wages they could claim only to employees who were paid but unable to perform their duties.

Removing part-time employees from the headcount can make a huge difference in determining eligibility as a small or large employer. Also, if you used to pay an employee to work 40 hours a week, but they now work 20 hours, there could be a possibility to regard a fragment of the cost of their benefit as payment for not working.

Nominal Effect

Beyond supply chain disruptions, many mitigating factors could have impacted your normal business operations and help your firm qualify for a refund before the ERC deadline takes effect.

Worker Safety

Most manufactured products are usually assembled by hand and the human operators are usually spaced 0.6 meters apart. Increasing the spacing intervals to 1 or 2 meters as directed by the CDC and WHO caused an increase in the length of the assembly line, thereby increasing manufacturing costs, and decreasing line productivity.

Equipping factory workers with the appropriate PPE also caused an increase in manufacturing costs and a reduction in finger dexterity, slowing down the assembly line. Production facilities that failed to follow the social distancing measures incurred a lot of costs because of the COVID-19 outbreak among factory workers, sometimes causing a total shutdown of the facility.

Any health restrictions related to social distancing or those which reduced or removed group meetings are all factors that could help your eligibility and increase your tax credit amount.

Limited Travel

Most factory and supplier partners need to travel for client meetings and to rekindle relationships away from the production facility. Any missed in-person interactions that disrupted your manufacturing process could also help you qualify. Some examples include building and maintaining relationships with suppliers, or the need to solve complicated engineering or product assembling difficulty problems in person.

Limited Oversight

To minimize economic waste and achieve a quick production process, manufacturing firms send engineers to oversee the development process. They inspect the assembly line and fix any issues as soon as possible, thereby making the production process faster. They also perform experiments and recommend specific processes like grease or glue applications, and monitor the improvements alongside their factory partners. Due to the travel restrictions, there was a lack of oversight, causing some production lines to shut down causing lost revenues.

Worker Illness

While many manufacturers introduced precautions such as washing hands, temperature checks, eliminating town hall gatherings, avoiding physical contact, use of face masks, and surveying potential symptoms, work days lost to illness still dramatically increased during the pandemic.

Even losing a minute portion of a manufacturing assembly line to illnesses could severely impact production and cause a nominal effect on gross revenue. Any labor shortages on your production line that had a noticeable impact on revenues could help you qualify for an ERC refund check.