Dear: Client
On Sunday, 27th December, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 was signed into law. This law made several changes to the Employee Retention Credit, which was previously only available to the taxpayers who had not obtained a Paycheck Protection Program (PPP) loan. This credit is now open to all employers with payroll, regardless of whether or not they obtained a PPP loan.
What is the Employee Retention Credit (ERC)?
The employee retention credit is a refundable tax credit, which is 50% or 70% of up to $10,000 in wages paid to an employee by an eligible employer whose business has been financially impacted by COVID-19. This means that your business can get a tax credit for a part of payroll paid during quarters in 2020 or 2021 when your business suffered due to COVID-19. Certain rules apply, which are outlined below.
TAX YEAR 2020 EMPLOYEE RETENTION CREDIT
A taxpayer is eligible for retroactively obtaining a credit of up to $5,000 per employee for wages paid from March 13th, 2020 and December 31st, 2020 if:
- The business was shut down fully or partially due to government orders and paid wages during this time. You can claim the ERC on wages paid during the shutdown.
- Alternatively, the business paid wages during a 2020 quarter when there was an over 50% drop in gross receipts year-on-year as compared to the same quarter in 2019. Therefore, if your Q2 gross receipts for 2020 were less than 50% of your Q2 gross receipts for 2019, you start qualifying for the employee retention credit.
Additional rules to bear in mind are:
- The credit continues until the end of the quarter during which your gross receipts go up to 80% of your 2019 quarter receipts, when compared year-on-year. To illustrate, let's assume you started qualifying for the ERC in the second quarter of 2020. If your Q3 gross receipts for 2020 were 75% of what they were for the same quarter in 2019, you still qualify for the entire quarter. Subsequently, if your Q4 gross proceeds were 80% or even 90% of Q4 2019 gross receipts, you qualify for the ERC until the end of the 4th quarter.
- If your business has over 100 Full Time Equivalent employees, you can only claim the ERC for wages which you paid when the employee was not working.
- You cannot claim the ERC for wages which you used PPP funds and got forgiveness for. So if you used your PPP funds for all payroll in May, you would not be able to apply the ERC to the payroll in May.
- Normally, you would have reported this credit on each Form 941 as the quarter closed and you claimed the credit. However, you can now claim the credit retroactively. The detailed procedure for claiming the credit retroactively has not yet been disclosed by the Treasury.
TAX YEAR 2021 EMPLOYEE RETENTION CREDIT
A taxpayer is eligible for obtaining a credit of up to $14,000 per employee for wages paid from January 1st, 2021 to June 30th, 2021, if:
- They have a more than 20% drop in gross receipts in the first or second quarter of 2021, as compared to the corresponding quarters in 2019.
- Alternatively, they have a more than 20% drop in gross receipts compared to the previous calendar quarter. For example, if your Q1 2021 gross receipts are 25% less than your Q4 2020 ones, you qualify for the 2021 ERC for that quarter.
Additional rules to bear in mind are:
- The maximum amount of credit you can receive is 70% of $10,000 in wages paid to any employee in any quarter. Therefore, the maximum ERC per employee in 2021 is $7,000 per quarter or $14,000 total.
- You may claim the ERC under these rules if you have less than 500 employees, up from the 100 in the 2020 ERC.
- You can obtain an advance on the credit for any quarter only if you are reasonably certain that you will qualify for the ERC for 2021.
- You cannot claim the ERC for wages which were funded by the Second Draw PPP money.
- You report this credit on each Form 941 as the quarter closes and you claim the credit. Therefore, if we run your payroll, it is imperative that you let us know when you intend to use PPP money and which wages you want to use the ERC for.
- We are waiting for guidance from the Treasury to elaborate these rules for 2021.
You may read the details of the credit as it stood before December 27th, 2020, on the IRS website. However, please bear in mind that the FAQs have not yet been updated for the new law.
As always, we are here to assist you with questions and concerns, so please feel free to contact us at any time. Thank you for your business — we appreciate it very much.
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