EMPLOYEE RETENTION CREDIT (ERC)
The CAA legislation provided some important updates to the Employee Retention Credit. Not only did this legislation extend the credit thru June 30 2021 but the credit is now retroactively available for all entities that paid wages during the periods of March 12 through December 31, 2020.
2020 CREDIT (AVAILABLE RETROACTIVELY)
Previously, employers were not eligible for the ERC if they received a PPP loan. Under the new CAA Legislation, employers are eligible for this credit even if they received a PPP loan. However, it is important to note that any wages used to claim forgiveness or FFCRA sick leave credit cannot be used for the ERC. You should work with your CPA to determine your eligibility before claiming the ERC.
How to Qualify
Eligible businesses with less than 100 employees must have at least one of these qualifying events:
- had their business fully or partially suspended due to “orders from an appropriate governmental authority” during at least one quarter in 2020 OR
- had greater than a 50% drop in gross receipts for quarters in 2020 relative to the same quarter in 2019.
Using the first qualifying event, an eligible business will only get a credit on wages paid during the part of the quarter the business was closed due to a government-mandated shutdown. To illustrate, assume your business was closed from March 15 through April 15th and you paid wages to your employees during these weeks. You will have an eligible quarter for both Q1 and Q2, but eligible wages will only be from March 15 – March 31st for Q1, and April 1 – April 15th for Q2. Wages paid before or after the government-mandated closure period do not qualify for the ERC.
If the second test is met, every quarter beginning with the quarter where gross receipts dropped below 50% is an “eligible quarter” until the END of the quarter in which the business’s receipts have returned to at least 80% of what they were for the same quarter in 2019.
Available Credit Calculation
Eligible wages are wages paid between March 12 and December 31, 2020. The credit is calculated by taking 50% of the eligible wages (including allocable health care costs) paid to each employee for each eligible quarter. Once you have paid one employee $10,000, you have maxed out the $5,000 credit (50% of $10,000) for that employee for the entire year of 2020.
If you believe your business meets either or both of the two above conditions during the 2020 year, you can claim a maximum refundable payroll tax credit of $5,000 per employee. You should work with your CPA to determine your eligibility before claiming the ERT Credit.
2021 CREDIT
How to Qualify
Eligible businesses must have one of these qualifying events:
- had their business fully or partially suspended due to “orders from an appropriate governmental authority” during quarter 1 or quarter 2 in 2021 OR
- had greater than a 20% drop in gross receipts quarter 1 or quarter 2 in 2021 relative to the same quarters in 2019. Businesses that were not in existence in 2019 may use the same quarters of 2020.
Available Credit Calculation
Eligible wages are wages paid between January 1, 2021 and June 30, 2021. The credit is calculated by taking 70% of the eligible wages (including allocable health care costs) paid to each employee for each eligible quarter. Once you have paid one employee $10,000 in one quarter, you are have maxed out the $7,000 credit (70% of $10,000) for that employee for that quarter of 2021. The credit is available for quarter 1 and quarter 2 of 2021, so therefore the maximum credit per employee is $14,000, capped at $7,000 per quarter.
Author:
Ashley Holderness,CPA
Client Services Manager
Dental CPAs