Employee Retention Credit, Have you claimed that yet? The Employee Retention Credit was created to help employers keep employees on payroll as part of the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. Signed into law by President Donald Trump on March 27, 2020, it was in response to the economic downturn caused by the COVID-19 pandemic. The ERC was intended to be used as a refundable payroll tax credit for “qualified wages” paid to full-time employees who were retained between March 13 and December 31, 2020.
However, it was modified significantly with the signing of the Consolidated Appropriations Act (signed into law on December 27, 2020). Every business owner should be aware of the changes as they are applicable in the first two quarters of 2021. Most importantly, the new law now allows employers who received Paycheck Protection Program, also known as PPP, loans to claim ERC for qualified wages not treated as payroll costs in obtaining forgiveness of the PPP loan.
Here we’ll look at how to claim the Employee Retention Credit (ERC) for the first half of 2021 and how this tax credit can help your business.
2020 Versus 2021
2020: For employers including PPP borrowers, the ERC credit can be claimed for 50% of qualified wages and health plan expenses up to $10,000 per employee annually for wages between March 13th, 2020 and December 31st, 2020. This means the credit could be worth up to $5,000 per employee.
2021: For qualified employers including PPP borrowers, you can claim against 70% of qualified wages and health plan expenses up to $10,000 per employee per quarter in 2021. This means the credit credit could be worth up to $7,000 per employee per quarter.
Another change: “for an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts,” according to the IRS. However, an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.
How to know if you’re eligible?
While the ERC may seem confusing, especially in light of PPP provisions, it’s worth taking the time to see if you qualify for the potential tax credits you could earn. To determine eligibility, there are two paths to check:
- A business can claim ERC if a COVID-19 government order caused your operations to stop either fully or partially during the period the order was enforced.
- Or, if your business had a significant decline in gross receipts.
If a business falls under path number two — a significant decline in gross receipts — then the covered period starts on the first day of the quarter in which the decline occurred and ends on the last day of the quarter in which gross receipts recover to 80% or greater compared to the same quarter in 2019, according to the IRS rules.
For 2020 the formula changes: the decline must be 50% or greater during a 2020 calendar quarter compared to the same period in 2019. And for 2021, a business can qualify with a 20% or greater decline in gross receipts in a 2021 calendar quarter compared to the same period in 2019.
And there’s good news for businesses that did not exist in 2019. You may qualify as well. If your company did not exist in 2019 you may compare 2021 quarterly gross receipts to the same 2020 quarters to determine eligibility.
How does PPP play a role?
If you took one or more PPP loans, you may still qualify for ERC. However, you’ll need all of your PPP documents on hand to work on ERC eligibility. In order to calculate which payroll dollars you have already claimed for PPP loan forgiveness, you’ll need to know your PPP loan forgiveness period. This will allow you to accurately calculate your credit.
To ensure you qualify for ERC and don’t jeopardize your tax accuracy, note that you cannot apply wages and health expenses of PPP forgiveness for the ERC. If the Family First Coronavirus Response Act reimbursed expenses, then they cannot be used toward the ERC.
The definition of a large employer has also changed. The 2021 definition now says a large employer is one with 500 employees or more (an increase from the previous 100 employees or more). This allows those within that definition to count wages paid to both active (working) employees and those not providing services.
Note: If you were self-employed, you do not qualify for ERC for your own wages. However, if you employed other people, you might qualify for the ERC wages you paid to them.
Talk to an Expert
It’s natural to feel overwhelmed by the latest ERC information and how it affects PPP loans and your taxes at large. That’s why tax professionals are here to help. If you need assistance making sense of how to claim ERC credits, reach out to a professional financial expert who can walk you through Employee Retention Credit and the forms needed to apply. You don’t have to handle your business’s financial future alone.