Today we are going to talk about the Employee Retention Credit (ERC.) This credit was available in 2020, but many business owners did not take advantage of this because you could not get both the PPP and ERC.
The Big change – You can now take advantage of BOTH the ERC and the PPP. This change is retroactive to 2020. The ERC has been extended through June 30, 2021.
Any business that borrowed a PPP loan can now go back and also claim the ERC for 2020.
BUT you can’t use the same payroll costs to calculate the ERC and the PPP. You still have to meet the minimum 60% use of funds on payroll costs for PPP.
This will require an analysis of your payroll costs to determine the best way to maximize 2020 payroll costs across the PPP and ERC. You may want to look at using more non-payroll costs for your PPP forgiveness to have eligible payroll costs for ERC.
You can use the ERC for the 1st two quarters of 2021 with more favorable rules for higher credit. The process to retroactively claim these credits has not been issued as of 1/11/21.
Below we will review the 2020 rules and the new 2021 rules as they have changed (more favorable in 2021.) If you are looking to retroactively receive a credit in 2020 you must meet the 2020 rules.
Employee Retention Tax Credit – 2020 Rules
Eligible employers will receive a refundable payroll tax credit for up to 50% of wages paid to employees after March 12, 2020, through December 31, 2020 (if you meet one of the below two requirements).
1. The operation of the business is fully or partially suspended due to orders from a government authority limiting commerce, travel, or group meetings due to COVID-19.
OR
2. Gross receipts are less than 50% (50% decline) of the gross receipts for the same quarter in the previous year until gross receipts are 80% of the gross receipts in the same quarter for the previous year.
An Eligible Employer is defined as an employer that is carrying on a trade or business in 2020 and for the calendar quarter.
Wages are limited to $10,000 per employee annually (maximum credit of $5,000 per employee) and cannot exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.
Employee Retention Tax Credit – 2021 Rules (2020 rules crossed out with new changes shown)
Eligible employers will receive a refundable payroll tax credit for up to 50%
70% of wages paid to employees after January 1, 2021, through June 30, 2021 (if one of the below two requirements are met).
1. The operation of the business is fully or partially suspended due to orders from a government authority limiting commerce, travel, or group meetings due to COVID-19.
OR
2. Gross receipts are less than 50% 80% (20% decline) of the gross receipts for the same quarter in 2019.
Can also use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility.
Wages are limited to $10,000 per employee per quarter annually (maximum credit of
$7,000 per quarter) and can exceed the amount employer was previously paying the employee
Employee Retention Tax Credit – Additional Requirements
The ERC is reduced by any credits received under the Families First Coronavirus Response Act.
Can only claim a credit on wages not paid with PPP Loan funds.
Available for employers with more than 500 employees.
If the employer has over 100 employees, then the credit is only available if employees stay at home and do not provide ANY services for wages paid before December 31, 2020. This threshold is increased to 500 employees from January 1, 2021, to June 30, 2021.
Health care costs are now considered qualified wages even if the employee is furloughed or no other compensation is paid.
Coming up next week - EIDL changes!