Wednesday, July 14, 2021

Employee Retention Credit - A Top Level Overview

Over the past year plus, the U.S. Government has rolled out a variety of programs to help businesses as we work through the pandemic.  The Employee Retention Credit (ERC) is available for businesses that sustained declines in their gross receipts as compared to 2019.  The credit is available both in 2020 and 2021 although the rules for eligibility differ between those two years.  The eligibility rules are easier to meet for 2021 as compared to 2020 (e.g. 500 employee cap vs. 100 in 2020, only a 20% decline in a quarter's gross receipts needed in 2021 as compared to that same quarter in 2019 vs. a 50% threshold in 2020 vs. 2019).  Further, the credit available for 2021 is up to $7,000 per employee, per quarter vs. $5,000 per employee for the full year in 2020.  The numbers add up and the credit generated is quite meaningful.

A business can go back and file amended payroll tax returns for previous quarters in which they qualify to claim the credit.  For payroll tax returns in future qualifying quarters (the program has been extended through the end of 2021) the credit can be claimed while preparing those returns.  For a business with 50 employees, in 2021 an eligible business clearing all the issues that need to be addressed (notably PPP covered period), up to $350,000 in credit can be generated.  This is for each qualifying quarter.  If a business qualifies for one quarter, the subsequent quarter will also qualify.

In addition to understanding the program, it's important to note that a business cannot "double dip" with other programs offered.  For example, wages paid claimed as part of the loan forgiveness for PPP are not eligible to be used as part of the ERC.  As a result, it is important that a borrower of PPP funds be careful about how they complete their PPP round 2 loan forgiveness applications.  Many borrowers have taken the easy path of claiming labor, and only labor, when completing these forgiveness applicatoins.  It's important to use the other factors available, such as rent, utilities, health/welfare/pension benefits for unions, etc. to achieve loan forgiveness.  This preserves wages that can be used for the ERC.

For further reading and a nice summarizing table, see this ERC Overview Article.   

No comments: