Employee Retention Credit

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Ajay Kumar, CPA, MBA

What is the Employee Retention Credit?

The ERTC is a refundable credit that businesses can claim on qualified wages, including certain health insurance costs, paid to employees.

CARES Act – 2020            

For employers who qualify, including borrowers who took a loan under the initial PPP, the credit can be claimed against 50 percent of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and Dec. 31, 2020.

KEY TAKEAWAYS

  • The updated Employee Retention Credit (ERC) provides a refundable credit of up to $5,000 for each full-time equivalent employee you retained from March 13, 2020, to Dec. 31, 2020, and up to $14,000 for each retained employee from Jan. 1, 2021, to June 30, 2021.
  • You qualify as an employer if you were ordered to fully or partially shut down or if your gross receipts fell below 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021).
  • If you were not in business in 2019, then you could use the corresponding quarters from 2020.
  • You can claim your credit immediately by reducing payroll taxes sent to the Internal Revenue Service (IRS).
  • If your credits exceed payroll taxes, then you can request a direct refund from the IRS.
  • The new law, retroactive to March 27, 2020, now allows employers that received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages not treated as payroll costs in obtaining forgiveness of the PPP loan.

The CAA includes the following retroactive changes to the ERC. These changes apply to the period from March 13, 2020, to Dec. 31, 2020.

  • If you received a PPP loan, you may still qualify for the ERC for any wages not paid with proceeds from the forgiven portion of your PPP loan.
  • The CAA clarifies how qualifying tax-exempt organizations determine “gross receipts.”
  • Group healthcare expenses are considered “qualified wages.” This is true even if no other wages are paid to that employee.

The following elements apply to the ERC for Jan. 1 , 2021, to June 30, 2021:3

  • The ERC rate per employee is increased to 70% of qualified wages (from 50%) and the per-employee wage limit is increased from $10,000 for the year to $10,000 per quarter for 2021.
  • Your eligibility as an employer is based on gross receipts of less than 80% (versus less than 50%) compared to the same quarter in 2019. This means if your gross receipts decline more than 20% in 2021, you are eligible to take the credit.
  • You can elect to use the immediately preceding calendar quarter (i.e., Q4 2020 and Q1 2021) instead of Q1 and Q2 2021, respectively, compared to the same quarter in 2019, to determine eligibility.
  • If your company did not exist in 2019, you may compare 2021 quarterly gross receipts to the same 2020 quarters to determine eligibility.
  • The 2021 credit is available to public colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress.
  • By 2021, the definition of “large employer” changes from more than 100 employees to more than 500 employees. This allows you to use a broader definition of qualified wages if you fall within that threshold. In short, you can count wages paid to both active (working) employees and those not providing services.
  • The CAA also removes the limit on qualified wages defined as no more than the employee would have received in the 30 days before the qualifying period. Now, for example, you can take the ERC if you pay a bonus to an essential worker.
  • If you have fewer than 500 full-time equivalent employees, you will be allowed advance ERC payments during the quarter in which the wages were paid to those employees. This includes seasonal employers, part-time employees, and employers not in existence in 2019.

 

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