New Tax Credit Can Save Businesses Up to $14,000 Per Employee

Neil Hare
Wed, 24 Mar 2021 00:41:49 +0000

While the Paycheck Protection Program (PPP) garners most of the attention for small business relief, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 also created the Employee Retention Credit (ERC), which provided eligible employers a refund on their 2020 federal payroll expenses such as Social Security and Medicare taxes.

The ERC shares the same goal of PPP to incentivize employers to keep employees on the payroll during Covid-related shutdowns and restrictions. The ERC benefits were capped at $5,000 per employee for Q2, Q3, and Q4 of 2020 in the aggregate, which for most companies was far less than they could receive under PPP, so few used it.

The Taxpayer Certainty and Disaster Tax Relief Act (part of the Consolidated Appropriations Act, 2021), enacted December 27, 2020, and the recently enacted American Rescue Plan (ARP), expanded the ERC through the end of 2021 and increased the refundable and advanceable credit to $7,000 per employee for two quarters each or up to $14,000. Internal Revenue Service Guidance explains these changes in greater detail.

Businesses can now use ERC and PPP

The main issue with the Employee Retention Credit in 2020 was that companies who applied for and received PPP funds could not take advantage of both programs. For most companies, PPP was easier to access and offered more relief. PPP was calculated by multiplying monthly payroll in 2019 times 2.5 with a cap on maximum salary of $100,000 equaling up to $20,800 per employee. Conversely, ERC was only up to $5,000 per employee.

The recent legislation fixed this issue by allowing employers to take advantage of both ERC and PPP in 2021. The one caveat is funds from both programs cannot be used on the same payroll period; in other words, “no double dipping.” Due to the forgiveness rules around PPP, this should not be an issue. Businesses can pick their covered period of between eight and 24 weeks during which they can use their PPP funds on payroll and other qualified expenses and still receive forgiveness. Businesses can use the ERC during different time periods.

In some cases, employers can also “look back” to 2020 to claim the ERC retroactively. Specifically, those employers who received a PPP and, therefore, didn’t claim ERC can now do so for 2020.​​​​​​ In order to claim the ERC for 2020, employers must file amended returns for each applicable quarter of 2020.

Who is eligible for the ERC?

An IRS release on January 26, 2021, urged employers to take advantage of the ERC and summarized eligibility as follows:

Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:

1. 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

2. 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 in 2020, the decline in gross receipts were required to be less than 50%.)

For 2020, employers could calculate the amount of ERC over Q2, Q3, and Q4 by taking up to 50% of the first $10,000 of Qualified Wages paid per employee in the aggregate over all three quarters for a total of $5,000 per employee. For 2021, employers calculate the amount of ERC over two quarters, by taking 70% of the first $10,000 of Qualified Wages paid to each employee per quarter for a total of $14,000 per employee.

The definition of Qualified Wages is different for small and large employers. For small employers, this includes wages and payments into a Qualified Health Plan per the applicable quarter. For large employers, this only includes wages and payments into a Qualified Health Plan during the periods when employees could not perform services due to Covid restrictions or the decline in gross receipts. For 2020, the definition of small employers is those who averaged under 100 employees in 2019, and for 2021 that was increased to those who averaged under 500 employees in 2019.

More articles from AllBusiness.com:

3 Small Business Financing Alternatives to the Paycheck Protection Program

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Did Your Business Receive a PPP Loan from the SBA? Here’s How to Handle Potential Press Inquiries

5 Ways the New Stimulus Bill May Help Your Small Business

How do you claim the ERC?

The ERC is both refundable and advanceable, meaning employers can apply to the IRS for an advance payment against payroll costs in the first two quarters of 2021. This only applies to small employers, and they can file using Form 7200, Advance of Employer Credits Due to Covid-19.

Employers can access the ERC for the first and second quarters of 2021 prior to filing their by reducing employment tax deposits according to the regulations. Most payroll providers can assist with the appropriate reduction.

Employee Retention Credit: Looking ahead

The ERC provides an excellent opportunity to further offset employee costs while Covid-19 continues to impact the economy. However, the program is beset with delays and bureaucracy that may impact how quickly employers can access funds. Claiming the credit retroactively for 2020 will take many months at this point, with many business groups, including the U.S. Chamber of Commerce and American Institute of CPAs, already lobbying the Treasury Department to expedite the process.

Congress is currently working on extending PPP from its March 31, 2021, deadline to May 31, 2021, offering more time for businesses to apply. As usual, more regulatory changes are expected for the PPP program. In the meantime, whether you plan on applying for a first or second draw PPP, talk to your accountant about using the ERC for additional relief.