More money in your pocket for paying wages to employees. Businesses could be eligible to claim up to $19,000 per employee if they meet certain qualifications.
We have written a lot over the last year about the new legislation that came out of the COVID-19 pandemic. That’s because there’s a lot to cover. The Employee Retention Credit, especially after the revisions made to it with the most recent package passed by congress at the end of 2020, is an opportunity you certainly don’t want to overlook.
Could your business be eligible for a tax credit on wages paid to employees?
Just when year-end tax planning was almost complete for 2020, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA) on December 27, 2020. This law made quite a splash and created lots of changes to the 2020 tax situation for millions. Some of the most impactful changes related to reversing the treatment of eligible PPP loan expenses as well as significant enhancements to the Employee Retention Credit (“ERC”) that was enacted under the CARES Act.
So what does all of this mean? Here, we aim to help you wade through all of these acronyms and tax law changes. Under the Cares Act, a company that received a PPP loan was not eligible for the ERC. However, that all changed with the passage of the TCDTRA on December 27, 2020. Businesses can now claim the ERC even if they were a recipient of a PPP loan. One important point to watch out for though: the ERC may not be claimed for any wages that were used towards forgiveness of a PPP loan. This “double dipping” was expressly prohibited in the latest Act.
Are you eligible for the Employee Retention Credit?
If your business is considered an “essential” business, it will probably be a little harder to qualify, but it’s still possible. However, most of those businesses that qualify will fall into the category of those that were required to shut down or were otherwise significantly impacted by COVID-19. In order to qualify, a business must meet one of the following:
- Gross receipts were down at least 50% in the 2nd , 3rd, or 4th quarters as compared to the same quarter of 2019, OR
- The business had operations that were either fully or partially suspended due to a government order related to COVID-19.
- Gross receipts were down 20% in the 1st or 2nd quarters as compared to the same quarter of 2019 or the immediately preceding calendar quarter if the business did not exist in 2019, OR
- The business has operations that were either fully or partially suspended due to a government order related to COVID-19.
Time period and amount of Employee Retention Credit available
The ERC is currently available for wages paid from March 12, 2020 through June 30, 2021.
- For 2020, the amount of the ERC is equal to 50% of the qualified wages paid to an employee (up to $10,000 of eligible wages per employee). This results in a maximum credit of $5,000 per employee.
- For 2021, the amount of the credit goes up to 70% of qualified wages paid to an employee (up to $10,000 of eligible wages per employee per quarter). This results in a maximum credit of $14,000 per employee ($7,000 for both 1st and 2nd quarters of 2021).
This means businesses could receive as much as $19,000 per employee for if they qualified for the maximum credits in both 2020 and 2021.
How to claim the credit, even for tax periods already passed
The ERC is retroactive for wages paid after March 12th, 2020, which means a business that was previously ineligible because they received a PPP loan in 2020 can now claim the ERC if they paid qualified wages in excess if the amount used for PPP loan forgiveness. While this all may sound great, you may still be asking “How do I go about getting the money in my bank account?”
Eligible employers can get immediate access to the credit by reducing their payroll tax deposits they are otherwise required to make. If the payroll tax deposits are not sufficient enough to cover the amount of the available credit, the employer may get an advance payment from the IRS. Businesses can request these advance payments on Form 7200, Advance of Employer Credit Due to COVID-19. To claim the employee retention credit retroactivity for past quarters, qualifying employers should amend the appropriate employment tax returns by filing a Form 941-X.
“Small” Employer Provision
The CARES Act previously provided that employers with less than 100 employees could claim the ERC on all wages paid that otherwise qualify for the credit. Those with more than 100 employees could only claim this credit on wages paid to employees who were not working. The TCDTRA increases that threshold to 500 – meaning that employers with fewer than 500 employees, who are otherwise eligible, can claim the ERC on wages paid to employees who are still working.
Like many of the other incentives and opportunities introduced in response to the impact of COVID-19 on small businesses, the Employee Retention Credit can be a great source of relief to those businesses that felt it most.
Here at Culpepper CPA, we pride ourselves on staying up to date on these constantly-changing tax laws and can help you navigate the uncertainty. We can assist you with determining your eligibility and preparing the necessary forms to claim these credits. We provide a full range of in-depth tax planning and consulting services and specialize in helping you proactively manage your tax situation. Contact us today if we can help you with any tax, accounting, or business consulting projects.