Employee Retention Credit: The Little-Known Provision That Can Produce Big Savings on Quarterly Payroll Taxes

There is an overlooked element included in the Consolidated Appropriations Act (CAA) that can help organizations receive potentially large tax credits on quarterly payroll tax returns: The Employee Retention Credit (ERC).

At a time where few employers can afford to leave money on the table, understanding what ERC is and the basics of qualify for it could produce significant savings for your business.

Similar to the Coronavirus Aid, Relief and Economic Security (CARES) Act, the passing of the second stimulus package, or the Consolidated Appropriations Act (CAA), included another round of Paycheck Protection Program (PPP) loans and tax relief provisions for businesses, The Employee Retention Credit (ERC).

ERC QUALIFICATIONS AND YOU: THE BASICS

Previously, ERCs could not be claimed if a business accepted PPP loans. However, under the CAA, businesses that were granted PPP loans are now retroactively able to take advantage of ERCs if they qualify. ERCs are open to small businesses and non-profits, with 500 or less employees and meet one of the following criteria:

2020 Credit Eligibility:

  1. Was your business partially or fully shut down due to federal or local government health orders during any part of 2020 as a result of the COVID-19 (coronavirus) pandemic? This includes businesses that have been impacted by curfews, reduced capacity, full shutdowns and more in accordance with orders.
  2. Did you experience a decline of gross receipts of 50% or more in any quarter of 2020 compared to the same quarter in 2019?

2021 Credit Eligibility:

  1. Was your business partially or fully shut down due to federal or local government health orders during the first and/or second quarter of 2021 as a result of the COVID-19 (coronavirus) pandemic? This includes businesses that have been impacted by curfews, reduced capacity, full shutdowns and more in accordance with orders.
  2. Did you experience a decline of gross receipts of 20% or more in the first and/or second quarter of 2021, compared to the same quarter in 2019? For newer businesses, you compare it to the applicable quarter of 2020.
  3. Did your fourth quarter 2020 gross receipts decline by 20% or more compared to fourth quarter of 2019? An election can be made to sue the prior quarter’s gross receipts.

For 2020, an ERC is a fully refundable tax credit for employers equal to 50% of qualified wages and health insurance paid to an employee. The total credit is capped at a maximum of $5,000 per employee for the year. For the first and second quarters of 2021, the ERC was raised to 70% of qualified wages and health insurance paid to an employee with a capped maximum credit of $7,000 per quarter per employee.

There are several caveats to the two qualifying factors above. First, under the first qualifying option, businesses will only receive a credit on wages paid during the part of the quarter the business was shut down. Second, gross receipts are per the basis of accounting used on your tax returns. For 2020 ERC credits are open to businesses of 100 employees or less. For 2021, ERC credits are available to employers with 500 employees or less.

SIGNIFICANT SAVINGS

As we have learned from experience, should a business meet one of aforementioned qualifying standards, they could receive a substantial sum.

For example, a restaurant client of ours with 25 staff, not all of whom are full-time employees, will be receiving a 2020 ERC credit for approximately $100,000. For 2021, they will likely still be eligible, leading to an even bigger credit in an industry severely impacted by COVID-19. In the case of a larger client that is in the professional services industry that is also eligible for an ERC, we have calculated a preliminary credit of $365,000 in 2021 alone.

Because gross receipts are evaluated every quarter, the number of businesses across Greater Cincinnati and Northern Kentucky that qualify for ERC is significant – as well as the savings.

WHEN TO SEEK OUT A PROFESSIONAL

With so much information to digest, it can be easy for employers to become overwhelmed in trying to maximize their ERC credits. Pursuing ERC may involve retroactively applying for 2020 credits, amending your 2020 Form 941 or understanding how to do so for 2021. Others may, due to an ever-changing and evolving nature of the program, have PPP loan forgiveness that may factor in.

If you’re a business owner with questions regarding ERCs, please see our checklist below. Contact your Rudler, PSC advisor at 859-331-1717 to assist you in securing funds that can provide much-needed financial relief.

Checklist for Employee Retention Credit (ERC)

RUDLER, PSC CPAs and Business Advisors

This e-Tip is presented by John Wood, CPA, CVA.

If you would like to discuss your particular situation, contact John at 859-331-1717.

 

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