Whew! We’re moving on from the PPP loan blog series to dispensing knowledge about the Employee Retention Credit. Hello IRS!
With all of the changes and tax time approaching ~2 months away, I hope you’re ready to go. If you haven’t already filed, here is some information that’s about two weeks old, so grab a cup of coffee as we dive into a summary of this credit.
This credit is designed to make it easier for businesses that chose to keep employees on their payroll through all the challenges that COVID-19 brought and is still brining. For those of you who kept your employees, thank you and stick with me as I open some data.
The name of this is the Taxpayer Certainty and Disaster Tax Relief Act of 2020, and was enacted December 27, 2020. This made changes to the CARES Act and directly related to this was modifying and extending the Employee Retention Credit (ERC), for six months through June 30, 2021. Several of the changes apply only to 2021, while others apply to both 2020 and 2021.
Here’s what this new Act reads as an employer, you can a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. The limits of qualified wages are $10,000 per employee per calendar quarter in 2021. This means the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021. Depending on the size of your team, this could be a substantial credit.
You as an employer can access the ERC for Q1 and Q2 of ’21 prior to filing your employment tax returns by reducing employment tax deposits. If you are an employer with 500 or less full-time employees in 2019, you may request an advance payment (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, if you are an employer with greater than 500 employees, you are not eligible for the advance.
Here are a couple of eligibility rules. As of 1/1/21 employers are eligible if you operate a trade business during 1/1/21 – 6/30/21 (Q1 & Q2 of 2021) and either of these apply.
- A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50%).
If you started your business in 2020 then you can use the corresponding quarter in 2020 to measure your decline. For Q1 and Q2 of ’21 you can measure the decline in gross receipts using the quarter that came immediately before the current quarter (Q4 of ‘20 to measure Q1 of ’21).
Effective 1/1/21 the definition of qualified wages was changed to read:
- 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.
- For 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.
Lastly, here is a paragraph for employers who received PPP loans from 3/27/20 and forward. You may claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.
You may check out this link for more information COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs or contact me and we can talk through this.
The next blog will be about what to do after you receive your PPP loan.