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Employee Retention Credit

Employee Retention Credit: Here’s What You Need to Know

For most business owners, 2020 wasn’t the best year due to shutdowns, operation limitations, retaining employees, and all that has come with the COVID-19 pandemic. Late last year, The Consolidated Appropriations Act was passed which created major changes to the Employee Retention Tax Credit (ERC) rules and increased other provisions under the CARES Act. Initially, you could not take the ERC credit if you received a PPP loan, however, this new act allows for you to possibly take advantage of both. Many of the ERC provisions are effective starting January 1, 2021, but some of them are retroactive to the 2020 year. We’ve outlined what you need to know.

Qualifications:

In order for your business to qualify, you have to be considered a qualified employer. Qualified employers have two ways to qualify for this credit. The rules are different in 2020 and 2021.

In 2020, you may qualify by showing that you experienced a decrease in sales of more than 50% in any one calendar quarter when compared to the same quarter of 2019 (See chart below for details). Or you were either fully or partially shut down due to a mandatory order from a Federal, state, or local government agency, and not due to voluntary reasons.

If qualifying by means of gross receipts reduction, the business will receive the credit on the entire quarter they qualify for and the following quarter, until the reduction in gross receipts is reduced to less than 20%.

If qualifying by means of a mandated shutdown, you may only apply employee wages paid during the mandated shut down, which is to be calculated by the number of days and not by the quarter.

In 2021, you may qualify by showing that you had a decrease in sales of only 20% in any one calendar quarter when compared to the same quarter of 2019. To qualify for the first quarter of 2021, you may use your fourth quarter of 2020 sales or the first quarter of 2021 for your analysis (See chart below for details). The alternative qualifying method remains the same as 2020, based on if you have to have been either fully or partially shut down due to a mandatory order from a Federal, state, or local government agency, and not due to voluntary reasons.

  Q1 Q2 Q3 Q4
2020 Compare to Q1 2019 Compare to Q2 2019 Compare to Q3 2019 Compare to Q4 2019
2021 Compare to Q1 2021 to Q1 2019 or Q4 of 2020 to Q4 2019 Compare to Q2 of 2021 to Q2 2019

Exclusions from income – Please note that if your business received any funds established by the CARES Act, that amount will not count towards your gross receipts. This includes PPP Loans, EIDL Loans, shuttered venue grants, and other Cares Act debt forgiveness programs.

ERC 2020 vs. 2021

The 2020 ERC refundable tax credit is calculated by taking 50% of the first $10,000 in qualified wages per employee in 2020.

Whereas, the provision for 2021 allows for the ERC tax credit to use 70% of the first $10,000 in qualified wages per employee, for each quarter in 2021.

Qualified Wages

The IRS defines “qualified wages” for the ERC as wages paid to employees during the period that operations were suspended or the period of the decline in gross receipts. The following expenses may also be calculated with “qualified wages”:

  • Healthcare costs for a group health plan and other gross health costs
  • Paid sick or disability leave (not paid time off)
  • Pensions, retirement plan contributions, and stock options
  • Payment by the employer of a tax imposed on an employee
  • Payment for a service not normally in the course of the employers business
  • Tips (including cash tips)
  • Severance Pay
  • Any payment that the employee may exclude from their gross income.
Year Max per employee Include All Wages Include only wages while not working
2020 $10,000 for the year Less than or equal 100 FTE in 2019 More than 100 FTE in 2019
2021 $10,000 per quarter Less than or equal 500 FTE in 2019 More than 500 FTE in 2019

*Full-time employees (FTE) are those that work a minimum of 30 hours per week or 130 hours per month.

Exclusions

As mentioned above, employers are permitted to receive both ERCs and PPP loans, however, an employer cannot use the same wages for both PPP forgiveness payments and ERC reimbursed wages.

Wages paid to relatives of over 50% owners do not qualify, however, the owner and their spouse do.

Additional exceptions need to be considered as the wages used for this credit cannot also be used for the following:

  • FFCRA paid sick leave and paid family leave
  • Wages paid for section F5S paid family/medical leave credit
  • Paid time off
  • Severance pay for former employees
  • Wages used for PPP forgiveness and certain other credits under the CARES Act, as mentioned above.

Wages paid during the shutdown or partial closure cannot be more than what would have normally been paid for the work performed in the same period of time during the 30-days prior to when operations were suspended or the loss of revenue occurred, but only if the employer had more than 100 average monthly FTE’s in 2019.

To claim the credit for 2020 you will need to file a 941X form to claim. For 2021, you can just claim the credit on the 941 form as you are filing at the end of each quarter.

Important! The qualifying business must reduce the wage deduction on their income tax return dollar-for-dollar for the amount of credit received. Therefore, if you are applying for the credit in 2020, you will need to calculate and apply for your credit BEFORE filing your 2020 tax return in order to know if and by how much to reduce your wage expense on your tax return.

If you have any questions or would like to apply for the ERC, please contact us at [email protected] or (608) 356-7733.

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