Employee Retention Credits Offer a Payroll Tax Savings Opportunity for Businesses
The Employee Retention Tax Credit (ERC) is a payroll tax credit rather than an income tax credit. It’s not too late to claim the ERC, a fully refundable tax credit for qualified wages that employers pay to eligible employees. Eligible employers can claim the credit by computing the ERC amount for a pay period and decreasing the required payroll deposit by that amount. The ERC is reported on Form 941.
Here is some background: The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) created the ERC which allowed eligible employers get a refundable payroll tax credit equal to a percentage of eligible wages. The CARES Act also created the Paycheck Protection Program (PPP), which provided forgivable loans businesses could use to pay payroll, rent, utilities, and mortgage interest expenses. However, the CARES Act did not allow employers to obtain a PPP loan and claim the ERC, leaving it up to businesses to choose between the two. Later legislation, the Consolidated Appropriations Act (CAA), changed that by allowing eligible employers to claim the ERC even if they received a PPP loan.
Businesses are eligible for the ERC if they have experienced either of the following:
- A significant decline in gross receipts.
- Business operations were impacted by governmental orders.
Many businesses will qualify for the ERC even if they did not have a decline in gross receipts if governmental orders resulted in the partial or full suspension of business by limiting commerce, travel or group meetings (either directly or indirectly). This is a very subjective distinction that may need to be evaluated. The credit is also available to businesses that have wages in excess of their PPP loans.
This means that for most businesses, for 2021 the ERC is calculated as 70% of the first $10,000 (or $7,000) in eligible wages per employee for each of the first three quarters of 2021.
There are other requirements as well, including:
- Companies cannot claim the ERC on PPP wages used for PPP loan forgiveness.
- Companies have three years to claim the credit retroactively by filing an amended Form 941.
- Eligible wages are calculated differently for large employers and for small employers and for 2020 and 2021. However, all calculations use the average number of full-time employees employed during 2019.
The specific rules for claiming the ERC for Year 2020 and 2021 are as follows:
- Significant decline in gross receipts is defined as a decrease in a calendar quarter of 50% or more as compared to the same quarter in 2019.
- Credit is 50% of qualified wages paid after March 12th, 2020, with a cap of $10,000 per employee for a maximum credit of $5,000 per employee.
- Significant decline in gross receipts is defined as a decrease in a calendar quarter of 20% or more as compared to the same quarter in 2019.
- Credit is 70% of qualified wages per quarter (first three quarters of 2021) with a cap of $10,000 per employee per quarter for a maximum credit of $7,000 per employee per quarter ($21,000 for the year).
Keep in mind that your 2020 and 2021 taxes are affected should you claim this credit. Every business’s specific situation needs to be evaluated individually to be sure to maximize all available credits and deductions.