Everything you need to know about applying for the 2021 Employee Retention Credit (ERC).
You may not have heard of the Employee Retention Credit (ERC) until recently. If so, you are not alone! This is because businesses that applied for a Payroll Protection Program (PPP) loan in 2020 were not eligible to apply for the ERC. In 2021, however, that is all changed. Businesses that have applied for a PPP loan are now eligible for an employee retention credit both retroactively and into 2021, which is HUGE! This news was published in December 2020 with the passage of the Consolidated Appropriations Act.
So what does it all mean? What exactly is the Employee Retention Credit and how do you qualify for it? In this article, we’re going to break it all down for you so that you have a good understanding of what it is and how you can get the most out of your employee retention loan!
First, what is an employee retention credit?
To understand the employee retention credit, we’ll take a time machine all the way back to March 2020 (don’t worry, we’ll certainly fast-forward to the present day.)
In March 2020, the US federal government signed into law a $2 trillion relief act known as the CARES Act, which aims to provide aid to individuals, businesses and government organizations. As part of the CARES Act, if your business was severely impacted by the effects of COVID-19, you were eligible to apply for one of two incentives that would help businesses retain employees during the pandemic. These incentives were known as the Payroll Protection Program (PPP) and the Employee Retention Credit (ERC).
The PPP loan was the more prominent of the two and provided forgivable loans to businesses with fewer than 500 employees. If you applied for a PPP loan, then you were barred from applying for an employee retention loan. The employee retention credit is not limited by the number of employees and is a refundable payroll tax credit. The credit is available to taxpayers whose business was completely or partially suspended during a quarter in 2020 or experienced a dramatic drop in gross receipts compared to quarters in 2019. If eligible, they can receive a credit of up to $5,000 per employee who received a qualifying wage.
good, it was a fun little summary of where we come from. Now let’s go back to the future and talk about what has changed in the present!
A new law expands the ability to claim employee retention credit
In December 2020, a new relief law, the Consolidated Appropriations Act, was passed. This act extends the employee retention credit date and also changes who is eligible for it. The ERC date was originally supposed to end at the end of 2020, but it is extended until June 2021
In addition to the extension date, the biggest change in eligibility is that anyone who has taken out a PPP loan can Not only apply for the ERC in 2021 but can come back and apply for it in 2020. YES, it can mean a lot to business! However, the amount you received from the PPP loan will be different from the ERC. The PPP loan must be spent primarily on wages, where the ERC is based on wages that qualify, including health care expenses.
So how do you qualify?
To qualify for the employee retention credit, businesses must demonstrate one from the following circumstances:
- These operations were completely or partially suspended due to government orders
- If you are applying for credit in 2020, you must show a 50% or more drop in gross revenue from the same quarter of the previous year
- Or if you’re applying for credit in 2021, you must show a 20% or more drop in gross income from the same quarter in 2019.
What wages qualify?
If you meet one of the above criteria, then the salaries below will qualify for the time frame you are applying for:
From March 13th – December 31St 2020if you have less than or equal to 100 full-time employees in 2019, all wages are eligible. If you have more than 100 full-time employees in 2019, only wages for non-service employees qualify.
From January 1St – June 30th2021, if you have less than or equal to 500 full-time employees in 2019, all wages are eligible. If you have more than 500 full-time employees in 2019, only wages for non-service employees qualify.
*To determine how many full-time employees you had in 2019, use Form 1094-C. On page 2, in column B, enter the number of full-time employees you had during each month. Add the 12 numbers and divide by 12. This will give you the number of full-time employees you had in 2019.
How much credit can you get?
For loans applied for between March 13th – December 31Stscope 2020, a credit can be claimed for up to 50% of the first $10,000 in total qualified wages and health care expenses paid. That equates to $5,000 per employee.
For loans applied for between January 1St – June 30th2021, credit can be claimed for up to 70% of the first $10,000 in total paid qualified wages and health care expenses every three months. That equates to $7,000 per employee for each quarter.
How do you get it and how do you file for it?
Okay, we just dived into a LOT of detail! Feel free to take a breather if you need to. *DEEP BREATH*
Now for the final stretch!
As you read the above, you may already have a bunch of numbers running through your head trying to figure out how much credit you can get. After you sit down and crunch all the numbers, you’ll report your total qualified wages for 2020 and related health insurance expenses on your adjusted quarterly federal income tax return, Form 941-X. For 2021, you’ll report your total qualified wages and health insurance expenses on your Form 941 quarterly employment tax return. Please note that this form is currently in draft mode and cannot be used. The final form for 2021 has not been published yet.
The credit will ultimately be taken from your quarterly payroll tax bill against your employee’s portion of FICA. If your tax credits exceed your tax bill, you’ll get a check from the IRS.
Have questions about maxing out your credits?
You now know the basics and whether you are eligible to receive an ERC. It’s time to start the process of getting your credits!
As you can see, determining how much you qualify for the employee retention credit can be tricky. If you’re not sure where to start or have questions, work with your accountant or payroll professional. There are also outside consultants who specialize in maximizing tax credits. If you want to make sure you’re getting the most out of your ERC, it may be worth seeking out an outside specialist.
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