The Internal Revenue Service (IRS) urges employers to take advantage of the newly-extended Employee Retention Credit (ERC), designed to make it easier for businesses that, despite challenges posed by COVID-19, choose to keep their employees on the payroll. The ERC is one of the more popular relief items for businesses and recent legislation has made it even more attractive.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to the employee retention tax credits previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including modifying and extending the Employee Retention Credit (ERC), for six months through June 30, 2021. Several of the changes apply only to 2021, while others apply to both 2020 and 2021.
Employers can access the ERC for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers, those with an average of 500 or fewer full-time employees in 2019, may request advance payment of the credit, subject to certain limits, after reducing deposits. In 2021, advances are not available for employers larger than 500 employees.
Not every business qualifies for ERC. To be eligible, it must meet either of these criteria:
- The business was fully or partially suspended due to orders from the federal or state government limiting commerce, travel, or group meetings due to COVID-19.
- The business experienced a 50% year-over-year decline in gross receipts during any quarter of 2020 or a 20% decline in the first two quarters of 2021 compared with the same period in 2019.
- Certain governmental employers, such as state colleges, universities, hospitals, are now eligible.
- Certain businesses that were started in response to the pandemic may be able to claim the credit.
Small or Large Business?
If your business is eligible, the next step is determining whether you qualify as a small or large business. The definitions of business size have changed. For 2020, businesses with 100 or fewer employees were considered small businesses. For 2021, businesses with up to 500 employees are classified as small businesses.
For eligible small businesses, wages paid in 2020 are eligible for a 50% credit, which changed to 70% in 2021. For eligible large businesses, only wages paid to employees who were furloughed or not working qualify for the credit. Otherwise, the limits are the same: 50% for wages paid in 2020 and 70% for wages paid in 2021.
Wages paid to some employees who work at a level below their normal qualifications may also qualify.
The maximum credit is $5,000 for tax year 2020 and $7,000 per quarter for each of the first two quarters of 2021.
Other Major Changes
- Businesses can take the ERC even if they borrowed PPP funds. This change is retroactive for wages paid after March 12, 2020. There is a caveat: Businesses may not take a double deduction. They may not use the same wages for the ERC as they do for PPP loan forgiveness.
- The ERC was extended through June 30, 2021.
- Businesses may use the immediately preceding quarter to determine eligibility.
This is a summary of many complex provisions that may affect how a business works with other relief programs. To make sure you are making the best use of any programs for your business, contact Mark R. Dreher, CPA, Brandon W. Temple, CPA, or Barry S. Graham, CPA.