Employer Retention Credit What You Need To Know

Employee Retention Credit can save companies a very substantial amount of money on their 2021 taxes. However, it is a complicated program and navigating it can be difficult. This blog is quite technical. If you have questions about the information, please contact us: contact@fbpcpa.com.

The original Employer Retention Credit (ERC) was in the CARES Act that was passed in the Spring of 2020. Essentially, it was a credit that was intended to keep employees on payroll and with health care coverage. Healthcare and payroll count as qualifying wages in this calculation. It was a refundable credit that was allowed to offset payroll tax deposits.

Many small businesses did not pay attention to ERC because originally, in the CARES Act, if a company received a PPP loan, they were not allowed to take the ERC. However, there have been many adjustments to the program since the original act was passed and the American Rescue Plan enacted in April 2021 made further significant changes.

If your business did not take advantage of this credit in 2020, but you believe you qualified, you can submit Form 941-X. You may want to do this through a CPA to ensure it is done correctly.

Below is an outline of the ERC program, under the current rulings as well as past criteria in case you plan to amend your 2020 taxes. Because it is still fluid, updates will be made as they become available.

March 13, 2020 to December 31, 2020

For each quarter you are requesting ERC, there must have been a decline of 50% in your gross receipts compared to the same quarter in 2019 or you must have experienced a government-imposed shutdown or reduction of hours. *

You must have had between 1-100 W2 full-time employees, not counting owners.
You must have been in business before February 16, 2020.
The credit is 50% of qualified wages. Group healthcare plan expenses are included in qualified wages.
The maximum credit per employee for the year is $5,000.
Credit can only be applied to wages that were not forgiven under PPP.

Q1 and Q2 2021

Q1—If there was a reduction of 20% for Q4 2020 compared to Q4 2019 – then you can qualify for Q1 2021.
For each quarter you are requesting ERC, there must have been a decline of 20% in your gross receipts compared to the same quarter in 2019 or you must have experienced a government-imposed shutdown or reduction of hours. *
You must have had between 1-500 W2 full-time employees, not counting owners.
You must have been in business before February 16, 2020.
The credit is 70% of qualified wages. Group healthcare plan expenses are included in qualified wages.
The maximum credit per employee is $7,000 per quarter, $28,000 for the year.
Credit can only be applied to wages that are/were not forgiven or are expected to be forgiven under PPP.

Q3 and Q4 2021

For each quarter you are requesting ERC, there must have been a decline of 20% in your gross receipts compared to the same quarter in 2019 or you must have experienced a government-imposed shutdown or reduction of hours. *
You must have had between 1-500 W2 full-time employees, not counting owners.
For these two quarters, you may qualify if you started your business after February 15 2020 if your gross receipts are <$1 million and you qualify as a Recovery Start Up Business.
The credit is 70% of qualified wages. Group healthcare plan expenses are included in qualified wages.
The maximum credit per employee is $7,000 per quarter, $28,000 for the year.
Credit can only be applied to wages that are/were not forgiven or are expected to be forgiven under PPP.

*The credit can only be taken for the time of the shutdown or reduction of hours. If your business had to reduce hours for one month of the quarter, you can only claim that month, for example.

Furthermore, the current ruling states that a company that meets the qualifications for one quarter automatically qualifies for the following quarter, even if the criteria is not met in the following quarter.

The fine print.

There are some additional items to be aware of. You cannot claim the credit for wages under the following circumstances:

Wages paid to employees for which the company received a tax credit for paid sick and family leave.
The company is allowed a Work Opportunity Tax Credit.

It is complicated!

This is just a brief overview of the program. There are additional items, including special consideration for companies operating in declared disaster areas, that pertain to unique circumstances.

The program can be very beneficial to your business if filed correctly. The IRS American Rescue Plan document on the program can be found here: Notice 2021-23