Yes, you heard that correctly. Thanks to the Employer Retention Credit created with the CARES Act enacted March 27, 2020, and The Consolidated Appropriations Act, 2021, signed into law by President Trump on December 26, 2020, free tax credits are available. The Employer Retention Credit is a big deal because it offers companies significant savings of up to a $5,000 maximum tax credit per employee for the year 2020 and $14,000 maximum tax credit per employee for the 1st two quarters of 2021.
You may be wondering why you haven’t heard much about the Employer Retention Credit. It’s probably because, until recently, many employers didn’t qualify as a result of receiving PPP funds. However, on December 26, 2020, The Consolidated Appropriations Act, 2021 made the credit available retroactively to those who received the PPP Loans.
Do you Qualify?
If you have employees and your business was fully or partially shut down due to orders from a government authority related to COVID-19 in 2020 and/or gross receipts were less than 50% of any quarter in 2020 compared to 2019, you could qualify for the Employee Retention Credit (ERC). For 2021 if gross receipts are less than 80% of that quarter in 2019, you could be eligible.
What’s the Catch?
Please note; you cannot use the same wages to qualify for the PPP loan forgiveness and the ERC. This is critically important to understand – as it may change what expenses you choose to use for loan forgiveness. If you haven’t applied for forgiveness and think you qualify for ERC, please contact us ASAP before applying!
Affiliate companies with 50% or more common ownerships need to aggregate the total number of employees.
How do you Calculate the Credit?
The credit is taken on your quarterly 941 forms by reducing your payroll tax payments. This means that you get to “keep” some of the employee and employer taxes as an immediate tax credit. It is even refundable if the credit is more than the taxes owed, or you had already paid in the payroll taxes.
- Maximum credit of $5K per employee for 2020. Calculated based on 50% of wages per employee up to $10K for the year 2020.
100 or fewer employees, all wages can be used.
- More than 100 employees only wages paid to employees who are NOT providing a service qualify.
- Included in the definition of wages are health insurance payments made on behalf of your employees.
- The credit applies for any periods in which your business is closed due to a government order OR beginning with the first quarter that your revenue is less than 50% of the same quarter in the prior year and you continue to qualify up to either the fourth quarter of 2020 or the quarter AFTER your revenue returns to more than 80% of the prior-year quarter.
- Maximum credit of $14K per employee for the 1st and 2nd quarter of 2021. Calculated based on 70% of wages and health insurance up to $10K per employee for each quarter in 2021.
- 500 or fewer employees, all wages can be used.
- More than 500 employees only wages paid to employees who are NOT providing a service qualify.
- Again, the credit applies for any periods in which your business is closed due to a government order, but for 2021, the alternate measure is any quarter that your revenue is less than 80% of the same quarter in 2019. This should allow more companies to qualify in 2021.
A nice bonus – for 2021, you can apply for an advance credit based on 70% of the average quarter payroll for the same quarter in 2019. This means you can get the credit before the wages are even paid. Here is some other good news for 2021 – if you qualify for the ERC for 2020, you most likely qualify for the 2nd round of PPP loans. Eligible business for the 2nd round of PPP loans are:
- Less than 300 employees.
- Who can show revenue decline of at least 25% in one quarter of 2020 compared to 2019.
- Max loan $2M
- Same calculation using 2.5 months of 2019 payroll; however, now restaurants and businesses in the accommodations industry get 3.5 months of payroll.
As with everything related to COVID relief over the past nine months, more guidance is coming. Be on the lookout for an upcoming webinar to include more details on the ERC.
For more information related to the Employer Retention Credit, please contact me.
Kelly A. Chambers, CPA | Director, Entrepreneurial Services Group
Utilizing her diverse accounting and business background, Kelly provides accounting, tax, and consulting services to small businesses in varied industries. Wasting no time getting to the heart of the challenges facing her clients, Kelly works to develop innovative, customized solutions. As a bonus, she is proficient in accounting information systems including QuickBooks, Peachtree, Business Works and is a Certified Bill.com Guru.