Employee Retention Credit

by , and | Mar 1, 2021 | Covid-19, Tax

Updated in March 2022

The Employee Retention Credit (ERC), established by the CARES Act, provides a dollar-for-dollar credit against employment taxes to qualifying companies impacted.  The  credit availability extends through September 30, 2021 for most taxpayers (the credit is available after September 302021 under special circumstances).  The Consolidated Appropriations Act (CAA) also expands the availability of the ERC to companies that received Paycheck Projection Program (PPP) loans.  Below are the main provisions of the ERC:

2020 Credit:

The refundable tax credit is equal to 50% of employee compensation (inclusive of health insurance) up to $10,000 per employee per year for wages paid between March 13 and December 31, 2020. Total credit available is $5,000 per employee.

2021 Credit:

The refundable tax credit is equal to 70% of employee compensation (inclusive of health insurance) up to $10,000 per employee per quarter through September 30, 2021. The total credit available for 2021 is $21,000 per employee.

 

Determining Eligibility for 2020:

Employers who

1. Have 100 or fewer full-time employees in 2019, and

2. Carried on a trade or business during 2020,

and

a. Had business operations (fully or partially) suspended due to governmental orders limiting the entity’s commerce, travel or group meetings, OR

b. Experienced a reduction in gross receipts of more than 50% for a calendar quarter in 2020 compared to the same quarter in 2019.  (Once gross receipts exceed 80% year-over-year the credit is no longer available.)

 

Determining Eligibility for 2021:

Employers who

1a. Have 500 or fewer full-time employees in 2019, or

1b. Has greater than 500 employees and paid wages to employees for time they are not providing services

and

2. Carry on a trade or business during 2021,

and

a. Have business operations (fully or partially) suspended due to governmental orders limiting the entity’s commerce, travel or group meetings, OR

b. Are experiencing a reduction in gross receipts of more than 20%  when compared to either 1) the same quarter in 2019 or 2) using the alternative quarter election for 2021 which uses the preceding quarter’s gross receipts when compared to the same quarter of 2019.

c. Please note that there are additional opportunities to qualify for specific scenarios i.e. new businesses or acquired business.

 

Claiming the credit for 2020:

Form 941 Quarterly Employment Tax Return

Claiming the credit for 2021:

Form 941 Quarterly Employment Tax Return

The ERC is now available even if you have a PPP loan:

Under the CAA, Companies who received a PPP loan can also claim the Employee Retention Credit.    Previously, under the CARES Act, companies that received PPP loans were not eligible to claim the credit.   Eligible companies may claim the 2020 ERC retroactively.

Qualifying wages are used to determine the PPP loan forgiveness and ERC amounts.   The same wages cannot be used in the calculation of PPP forgiveness and ERC.

If you already applied for PPP loan forgiveness and you qualify for ERC, there still may be an opportunity to receive the employee retention credit for some of the wages that were reported on the taxpayers forgiveness application.

Tax Treatment:

Tax deduction of compensation (inclusive of health insurance) expense is reduced by the amount of the credit received.  This reduction occurs for the tax year in which the qualified wages were paid or incurred.

Please contact Weinstein Spira with specific questions regarding the ERC, the CAA or PPP loans.

You may also like:

The Inflation Reduction Act: What Does it Mean to You?

The Inflation Reduction Act (IRA) became law on August 16, 2022.  There are wide-ranging provisions that are intended to reduce the budget deficit, address climate change and clean energy, lower the cost of health insurance and prescription drugs and reform parts of...

Reference Rate Reform: What You Need to Know

Do you have debt or other agreements that utilize the London Interbank Offered Rate (LIBOR) as the benchmark reference rate?  If so, are you prepared for reference rate reform? Over the past years, there has been an effort to move away from the LIBOR and other...

Income Tax Reporting for the Employee Retention Credit

If you are one of the many businesses that have taken advantage of the Employee Retention Credit (ERC) or plan to, you may be wondering about the impact the ERC refund has on your income tax return. In this blog post, we review the ERC and discuss the income tax...

How to Minimize Tax on Investment Income

When you invest in financial instruments, such as stocks, mutual funds, IRAs/401ks, commodities, and even cryptocurrency, the main goal is to grow your wealth. In many cases, once that initial investment decision is made, people tend to leave it there and go about...

1031 Exchanges: What You Need to Know

U.S. Internal Revenue Code Section 1031 allows real estate investors to swap one property for another and defer recognizing some or all the gain and the related tax liability from the sale of the first property—assuming some very specific rules are met. Over the...

Latest Posts