Employee Retention Credit
Get cash back for the employees that you retained in 2020 and beyond. Small business owners, LLCs, S-Corps, and W-2 employees are eligible for the ERC. This credit, like the $1,200 stimulus payment that American taxpayers received, is intended to assist small businesses during these difficult times.
On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act into law. Among the many provisions within the legislation, this Act allows employers to claim the Employee Retention Credit (ERC) on wages paid from Q1 2020 through Q3 of 2021. It eliminated the general ERC for Q4 2021, but qualifying businesses can still claim the Recovery Startup Business aspect of the ERC for Q3 and Q4 of 2021. This latest law now means employers eligible for the general Employee Retention Credit can receive up to $26,000 in refundable tax credits per employee.
The deadline to file these returns is April 15, 2024 for the 2020 ERC, and April 15, 2025 for the 2021 ERC.
Here is the breakdown:
- Up to $5,000 per employee per year in 2020 (50% of wages up to $10,000)
- Up to $7,000 per employee per quarter in Q1-Q3 2021 (70% of wages up to $10,000)
ALREADY TOOK A PPP LOAN?
The ERC is a tax credit that does not require repayment, not a loan. When it was first established, businesses could only claim one of the PPP or the ERC in the first stimulus, not both. That restriction has been modified, and firms can now apply for both types of support, giving much-needed relief and assistance.
Effective December 27, 2020, businesses that received a PPP Loan can also claim the ERC retroactively, as long as the same wages are not used for both programs. Our team of experts at PMF can help you maximize your ERC credits while ensuring no double dipping on your PPP loan wages.
AM I ELIGIBLE?
Employers are eligible if their business operations have been fully or partially suspended as a result of a government order,
- OR For 2020, if the business experiences a 50% reduction in quarterly receipts compared to a base period;
- OR For 2021, if the business experiences a 20% reduction in quarterly receipts compared to a base period.
- Due to government restrictions on commerce, travel, or group gatherings as a result of COVID-19, operations were totally or partially suspended.
- Total accruals for the employer were down significantly.
Defining a “Significant Decline”
- Employers who did not exist in 2019 can use the corresponding 2020 quarter
- In 2020 – Gross receipts have seen a 50% decline when comparing each 2020 calendar quarter to the same quarter in 2019 (the significant decline ends when the calendar quarter gross receipts are at least 80% of the same quarter in the previous year)
- In 2021 – Gross receipts have seen a 20% decline when comparing each 2021 quarter to corresponding 2019 quarter or can compare to preceding quarter (i.e. Q1 ‘21 vs Q4 ‘20)
- Tax-exempt entities (501(c)) should examine section 6033 of the Code to determine the definition of a significant decline in gross receipts.
ERC Credits are not taxable for Qualified Wages:
- 2021 Qualified Wages – wages paid after December 31, 2020 (Section 207) and before July 1, 2021
- 2020 Qualified Wages – wages paid after March 12, 2020 and before January 1, 2021
- “Qualified Wages” include any wages paid by an employer (with fewer than 100 employees in 2019) who maintains group health plans including health costs paid by employee and employer provided costs are pre-tax, sick leave and family leave under sections 7001 and 7003 of the FFCRA.
- This excludes wages paid to the business owner and their related parties, as well as any wages disclosed and approved for under the Paycheck Protection Program Forgiveness.
HOW MUCH CREDIT WILL I RECEIVE?
Offset your payroll tax and get cash back for credits above your payroll tax liability. This credit is refundable, meaning if you qualify for $50,000 in credit and only owe $8,000 in payroll taxes, you get a $42,000 cash refund on top of eliminating your tax liability.
The tax credit is equal to 50% of wages and compensation, up to $5,000 in wages for the year 2020. For Q1-Q3 2021, the credit is equal to 70% of wages and compensation, up to $7,000 in wages for each quarter. This equals a max potential credit of $26,000 per qualified employee (5k for 2020, 7k per first 3 quarters in 2021).
There are no limitations on how you can spend the cash, and no arbitrary payroll benchmarks to establish.
HOW MANY EMPLOYEES CAN I CLAIM?
Previously, businesses with 100 or fewer full-time employees could take the tax credit on all their employees. New legislation has changed that number to 500 full-time employees.
For employers with 500 or fewer full-time employees, the tax credit is for wages paid to all employees. For example, if you have 490 full-time employees and 200 additional part-time employees, the entire payroll is eligible up to the maximum credit per employee.
For employers with more than 500 full-time employees, the tax credit is for wages paid to employees not working. There is no limit on the number of employees or the size of your company that prevents you from taking your credit.
WHAT ARE THE CALCULATION PITFALLS?
Navigating the complexities of this new credit with the various legislative wage offsets can be difficult.
Did you know that businesses can’t do the following?
- Use PPP subsidized loans for the same wages
- Take work opportunity credits (WOTC) for the same wages
- Take the EMFLA or EPSLA payroll credits for the same wages
BUT YOU CAN…
- Take multiple tax credits for the same employee.
Our technology has been updated to reflect these complex calculations and allows you to maximize your tax credits NOW and in the FUTURE. We stand behind our work so you can get your people back to work.
To qualify for the ERC, the IRS will seek for your company to meet one of two crucial criteria:
- A drop in revenue over the course of a quarter. To claim the credit retroactively for 2020, you must show a reduction of 50% or more in any given quarter. For 2021, you simply need to show a 20% fall in revenue, and you can claim the ERC twice if this revenue decrease occurs in both Q1 and Q2.
- Your company’s “Full or Partial” closure. Local government restrictions or mandates restricting the number of employees or customers in your workplace, disrupted operations (keeping 6 feet from clients), being forced to work from home, or completely shutting down your business operations for an extended period of time are all examples of this.
Questions? Contact us at firstname.lastname@example.org or (212) 931-6858.