You may not have heard of the Employee Retention Credit (ERC) until recently. If so, you are not alone! This is because businesses that applied for the Paycheck Protection Program (PPP) loan in 2020 were not eligible to apply for the ERC. Although in 2021 that has everything change. Now businesses that applied for the PPP loan are eligible for the Employee Retention Credit both retrospectively and in 2021, which is HUGE! This news was released in December 2020 with the approval of the Consolidated Appropriations Law.
So what does all this mean? What exactly is the Employee Retention Credit and how do you qualify to receive it? In this article, we’ll break it all down so you have a good understanding of what it is and how you can get the most out of your Employee Retention Credit.
First, what is the Employee Retention Credit?
To understand the Employee Retention Credit, we’ll take a time machine to March 2020 (don’t worry, we’ll be sure to quickly jump back to the present).
In March 2020, the US federal government signed a $2 trillion relief bill, known as the CARES Act, which is intended to provide relief to individuals, businesses, and government organizations. As part of the CARES Act, if your business was severely impacted by the effects of COVID-19, you were eligible to apply for one of two incentives that would help businesses keep employees on staff during the pandemic. These incentives were known as the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC).
The PPP loan was the more notable of the two, providing forgivable loans to businesses with fewer than 500 employees. If you applied for the PPP loan, you were prohibited from applying for the Employee Retention Credit. The Employee Retention Credit was not limited by the number of employees and is a refundable payroll tax credit. The credit was available to taxpayers who had their business fully or partially suspended during a quarter of 2020 or had a drastic drop in gross receipts compared to quarters in 2019. If they qualified, they could receive a credit of up to $5,000 per employee. who received a qualifying wage.
OKAY, that was a quick and fun synopsis of where we come from. Now let’s go back to the future and talk about what has changed in the present!
The new law expands the opportunity to claim the employee retention credit
In December 2020, a new relief law, the Consolidated Appropriations Law, was approved. This law extends the date of the Employee Retention Credit and also changes who is eligible to receive it. The ERC date was originally supposed to end at the end of 2020, however it is extended until June 2021.
Aside from the extension date, the biggest eligibility change is that everyone who borrowed a PPP loan can Not only apply for the ERC in 2021, but you can go back and apply in 2020. YES, this can mean a lot for businesses! However, the amount you received from the PPP loan will be different from the ERC. The PPP loan must be spent primarily on payroll, where the ERC is based on qualifying wages, including health care costs.
So how do you rate?
To be eligible for the Employee Retention Credit, businesses must demonstrate one of the following circumstances:
- That operations were totally or partially suspended by government orders
- If you are applying for the credit in 2020, you must show a 50% or more decrease in gross receipts from the same quarter of the prior year
- Or if you are applying for the credit in 2021, you must show a decrease of 20% or more in gross receipts for the same quarter in 2019
What wages qualify?
If you meet one of the criteria above, the following wages will qualify for the time period you are applying for:
From March 13the – December 31St. 2020if you have less than or equal to 100 full-time employees in 2019, all wages qualify. If you have more than 100 full-time employees in 2019, only the wages of employees who do not provide services qualify.
From January 1St. – June 30ththe2021, if you have less than or equal to 500 full-time employees in 2019, all wages qualify. If you have more than 500 full-time employees in 2019, only the wages of employees who do not provide services qualify.
*To determine how many full-time employees you had in 2019, use Form 1094-C. On page 2, in column B, enter the number of full-time employees you had in each month. Add up the 12 numbers and divide by 12. That will give you the number of full-time employees you had in 2019.
How much credit can you receive?
For credits requested between March 13the – December 31St.2020 range, a credit of up to 50% of the first $10,000 in total qualified wages paid and health care costs may be claimed. This is equivalent to $5,000 per employee.
For credits requested between January 1St. – June 30ththe2021, a credit of up to 70% of the first $10,000 in total qualified paid wages and health care costs can be claimed per room. This is equivalent to $7,000 per employee for each quarter.
How do you receive it and how do you send it?
Well, we dove into a LOT of detailed information! Feel free to take a breather if you need to. *DEEP BREATHING*
Now in the final stretch!
As you read the above, you may already have a bunch of numbers running through your head trying to figure out how much credit you could receive. Once you sit down and put all the numbers together, you’ll report your 2020 total qualified wages and related health insurance costs on your Adjusted Quarterly Federal Income Tax Return, Form 941-X. For 2021, you will report your total qualified wages and health insurance costs on your quarterly payroll tax return on Form 941. Please note that this form is currently in draft mode and cannot be used. The final 2021 form has not yet been released.
Eventually, the credit will be taken from your quarterly payroll tax bill against your employee’s portion of FICA. If your tax credits exceed your tax bill, you will receive a check from the IRS.
Do you have questions about how to maximize your credits?
Now you know the basics and if you are eligible to receive the ERC. It’s time to start the process of claiming your credits!
As you can see, calculating how much you’re eligible for the Employee Retention Credit can be tricky. If you’re not sure where to start or have questions, work with your accountant or payroll specialist. Additionally, there are external consultants who specialize in maximizing tax credits. If you want to ensure you get the most out of your ERC, it may be worth seeking out an outside specialist.