What is the Employee Retention Tax Credit?
What is the Employee Retention Credit (ERC)?
The ERC is a benefit under the federal Covid-19 stimulus plan where businesses can receive funding through tax credits on their Federal Form 941 if they meet certain conditions in 2020 and 2021.
It was originally passed under the CARES Act in March 2020 and was extended with changes to the rules under the Consolidated Appropriations Act in December 2020 and was extended again under the American Rescue Plan Act in March 2021.
How does a business qualify for the Employee Retention Credit?
A business may qualify if it experienced a suspension or shut-down of the business during any calendar quarter because of a governmental order due to COVID-19 or if it experienced a significant decline in gross receipts.
- The rules for significant decline are different for 2020 and 2021.
- For 2020, a business qualifies if the gross receipts for any quarter are down 50% or more as compared to the same quarter of 2019.
- For 2021, a business qualifies if the gross receipts for any quarter are down 20% or more as compared to the same quarter of 2019.
- If a business meets the above conditions for any quarter and it continued to pay employees during that quarter, the business can receive tax credits applied to the qualified wages paid during the quarter. *Other qualifications must be met.
If a business received a PPP loan, can the business also take the Employee Retention Credit?
Yes. In 2020, businesses that received PPP loans were automatically ineligible for the ERC. At the end of 2020 with the Consolidated Appropriations Act, this was reversed. Businesses that received PPP loans can take advantage of the ERC. The only stipulation is that the same wages used for PPP forgiveness cannot be used for the ERC. Businesses may amend their 2020 Form 941 returns if they qualify for the ERC.
What quarters are eligible for the Employee Retention Credit?
The Employee Retention Credit is available for Qtr 2 2020 through Qtr 4 2021. It applies to wages paid from March 13, 2020 through December 31, 2021. NOTE: Credits for March 13 through March 31, 2020 are reported on the Qtr 2 2020 Form 941.
How are the credits calculated?
For 2020: For each quarter that the business is eligible, the employer gets a 50% credit against qualified wages paid to employees in that quarter up to $10,000 paid to each employee for the year.
In 2020, the maximum credit is $5,000 per employee for the year.
For 2021: For each quarter that the business is eligible, the employer gets a 70% credit against qualified wages paid to employees in that quarter up to $10,000 paid to each employee in that quarter.
In 2021, the maximum credit is $7,000 per employee per quarter.
Are there rules that the business must meet when calculating the Employee Retention Credit?
There are other rules that must be followed. The employer should review the rules and/or work with their accountant to make sure the credits are calculated correctly.
Some of the rules include the following:
- If the business received a PPP loan, then the wages used toward forgiveness of the loan cannot be used for the ERC,
- FFCRA wages cannot be used for the ERC, and
- Wages paid to owners and related individuals cannot be used for the ERC.
What should an Ahola client do if they think they may qualify for the Employee Retention Credit?
The client should work with their accountant or internal business tax professional to determine eligibility and calculate the credit amounts per quarter. The client should send an email to CovidSupport@ahola.com when they are ready to submit their credit amounts or if they have questions.