Employee Retention Credit
What exactly is the Employee Retention Credit (ERC)?
The ERC is a refundable tax credit on the employer’s share of Social Security taxes that your business pays if you’ve been impacted by local government shutdown orders related to the pandemic but choose to keep your employees on payroll instead of laying them off.
Throughout 2020, one of the issues with the ERC was that you could not claim the credit if you had also received a PPP loan. The CAA (in December 2020) retroactively fixed this issue. You still cannot “double-dip” and claim the ERC for payroll periods that were paid with PPP loan proceeds, but you can now claim the ERC for other payroll periods that weren’t funded with PPP loan monies. For example, if you pay your employees monthly and used PPP funding to make payroll for May and June 2020, then you cannot claim the ERC for those months on your second quarter payroll tax return, Form 941. However, you can claim the ERC for the payroll periods from March 13, 2020 through April 30, 2020, and then again from July 1, 2020 through December 31, 2020.
So if your business obtained a PPP loan in 2020 and thus never claimed the ERC on your quarterly payroll tax returns, it may be worthwhile to amend those tax returns and get a refund on this tax credit.
How much is the ERC?
For 2020, eligible employers could receive a tax credit of up to 50% of qualified wages paid, maxing out at 5,000 dollars, for each full-time employee kept on the payroll for the entire period between March 13 and December 31. For 2021, this has been drastically expanded, all the way up to 70% of qualified wages paid, maxing out at 7,000 dollars per employee, per calendar quarter. While the CAA had expanded and extended these provisions only through June 30, 2021, the ARP picks up the credit for quarters after June 30, through the end of 2021.
In other words, while the maximum credit for the entirety of 2020 was only 5,000 dollars per employee, the maximum credit for all of 2021 is 28,000 dollars per employee.
Who is eligible for the ERC?
Here’s probably the biggest whammy when it comes to claiming this tax credit.
In order to be eligible, your business operations need to be impacted by public health orders limiting your ability to do business. In other words, your business must have been forced to close or reduce capacity due to state or local mandates related to COVID-19. Alternatively, if your business experienced at least a 20% decline for the quarter, compared to the same quarter in 2019, then you are also eligible.
This is a significant change from the original CARES Act, which required a 50% decline in revenue.
Last thing on eligibility: For 2020, there was a 100-employee threshold that was important to the eligible wages that could apply to the credit. For 2021, this threshold has been increased all the way up to 500 employees. So if your business has more than 100 employees, be sure to add your Congress-critter to your 2021 holiday card list.
In addition to all this, there are special rules relating to businesses that weren’t started until 2020, seasonal employers, tax-exempt non-profit organizations, and the application of sick and family leave credits.
If you have any of these special circumstances, we definitely need to have a conversation right away to get you the maximum benefit from this tax credit.