What's New with the Employee Retention Credit: An Overview

8/27/2021 - By Jeanne Profita

The Employee Retention Credit (ERC) was created by the Federal Government to encourage small businesses to keep employees on their payroll during the COVID-19 pandemic. The credit includes qualified wages and employer health plan expenses paid to (and on behalf of) employees. Since the enactment of the ERC in 2020, it has been expanded and extended through December 31, 2021.

To determine if your company is eligible, you must qualify under one of the following provisions:

Experience a significant decline in quarterly revenue, as defined below:

In 2020 – A more than 50% drop in gross receipts in a calendar quarter compared to the same quarter in 2019
In 2021 – A more than 20% drop in gross receipts in a calendar quarter compared to the same quarter in 2019
In addition, special rules may allow for a following quarter to qualify if the previous quarter qualifies

Experience a full or partial government shutdown

The credit is calculated based on the year your business qualifies.

In 2020, the credit is worth up to $5,000 per employee for the first $10,000 of qualified wages. To qualify for the credit, the employer must have less than 100 employees. If the employer has more than 100 employees, they may still qualify for a credit for the time the employees were not working during the quarter.
In 2021, the credit increased from 50% annually to 70% quarterly for the first $10,000 of qualified wages. The credit is now worth up to $28,000 ($7,000 per quarter) per employee. In addition, an employer can now have up to 500 full-time employees. If they have more than 500, they may still qualify for a credit for the time the employees were not working during the quarter.

Facts to consider:

The ERC may be available to PPP loan participants. However, wages used to claim the ERC cannot have been included in “payroll costs” for purposes of determining the amount of PPP loan forgiveness.
New guidance has recently been released in regard to majority shareholders. In most cases, owners with more than 50% ownership in a corporation, either directly or by attribution, may not claim the ERC for their own wages.
If you claim an ERC for 2020 and you have already filed your income tax return, you will need to file an amended income tax return for the same year.

Please note, the bipartisan infrastructure bill as currently proposed would generally end the ERC early, making wages paid in the fourth quarter of 2021 ineligible for the credit.

Questions?

If you have any questions or think you may qualify for this credit, please contact our Tax team.

For more details on this IRS guidance, read our recent blog!

About the Author | Jeanne Profita

Jeanne is a manager in the Outsourced Accounting Solutions Department of Saltmarsh, Cleaveland & Gund. Her areas of expertise include preparation and review of financial statements, as well as preparing, processing, and filing sales tax returns. She serves our clients by providing support for QuickBooks® as a QuickBooks® Pro Advisor and other accounting software applications. Jeanne has over 25 years of experience working with various industries such as manufacturing, real estate, and professional service organizations.