EMPLOYEE RETENTION TAX CREDIT
As we approach tax season, the Employee Retention Credit (ERC) may be an important credit for businesses. The ERC is a fully refundable IRS payroll tax credit (not a loan) available to employers with the potential of up to $26,000 per employee in federal payroll taxes. Businesses that received round one and/or two of Paycheck Protection Program (PPP1 and PPP2) loans also qualify for the ERC.
The ERC has maximum payroll tax credits of:
- For the 2020 tax year: $5,000 per employee (50% of the first $10,000 of eligible wages).
- For 2021 Q1, Q2, and Q3: $21,000 per employee divided between the three quarters is allowed ($7,000 of eligible wages per quarter, per employee).
Example, if a small business with 25 employees is deemed eligible for the first three quarters of 2021, it could potentially receive a $525,000 IRS payroll tax credit (25 employees x $21,000).
The ERC is limited when it comes to large employers, which is a business that averaged more than 100 full-time employees in 2019 for the 2020 tax year and more than 500 full-time employees in 2019 for the 2021 tax year. If a business is a large employer, it can only claim the ERC for employee wages paid. This does not include work or employer-paid health insurance premiums for furloughed employees.
For Q3 of 2021, the limitation would not apply if a large employer’s gross receipts are less than 10% of the gross receipts for the same calendar quarter in 2019. Small businesses are exempt from this limitation.
Interplay Between the ERC and PPP
Qualifying businesses can claim the ERC for wages that are not applied to payroll costs when applying for PPP forgiveness. To obtain 100% PPP loan forgiveness and maximization of the ERC, businesses need to fully analyze their payroll costs. Non-qualifying wages include severance payments to former employees after a termination, wages exempt from Social Security and Medicare taxes, and wages paid to related individuals.
A business may qualify for the ERC if it experienced:
- Full or partial* suspension of business operations
- Gross receipts reduction
For the 2020 tax year, a “significant decline” in gross receipts is less than 50% of the employer’s gross receipts for the equivalent calendar quarter in 2019. For Q1, Q2, and Q3 of tax year 2021, a “significant decline” in gross receipts is if the gross receipts declined 20% or greater of the comparative quarter in 2019. For Q1 of the 2021 tax year, there is an optional election that allows a look-back to the immediately preceding quarter if there wasn’t a 20% decline in gross receipts.
*Partial suspension qualifiers: A business impact; A disruption in business; Inability to access equipment; Having limited capacity; Suspensions of your supply chain or vendors; Reduction in services offered; Reducing hours to accommodate sanitation; Suspension of some locations and not others.
Reach out to us if you’d like more information on the ERC and see how your business might qualify.