January 31, 2021 ERC – Employee Retention Credit – $19,000 Refundable Tax Credit Per Eligible Employee
Retain your employees—receive a 50% or 70% payroll tax credit!
The purpose of the Employee Retention Credit is to encourage employers to keep employees on the payroll, even if they are not working during the covered period due to the effects of the coronavirus outbreak. Here’s what you need to know as an employer to take advantage of this updated credit.
- The updated Employee Retention Credit (ERC) provides a refundable credit of up to $5,000 for each full-time employee you retained between March 13 and Dec. 31, 2020 and up to $14,000 for each retained employee between Jan. 1 and June 30, 2021.
- You qualify as an employer if you were ordered to fully or partially shut down or if your gross receipts fell below 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021).
- If you were not in business in 2019, you can use the corresponding quarters from 2020.
- You can claim your credit immediately by reducing payroll taxes sent to the IRS.
- If your credits exceed payroll taxes, you can request a direct refund from the IRS.
- The new law, retroactive to March 27, 2020, now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages not treated as payroll costs in obtaining forgiveness of the PPP loan.
How do I know if I am an eligible employer for this credit?
The eligibility criteria outlined below is referring to the Employee Retention Credit as it is revised in Bill HR 133, Taxpayer Certainty and Disaster Tax Relief Act of 2020, signed December 27, 2020. This went into affect January 1, 2021 and ends June 30, 2021.
While the IRS has yet to update their webpages on the ERC, the changes outlined in the bill are as follows:
- Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees;
- Removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers;
- Clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance
- Provides that employers who receive Paycheck Protection Program (PPP) loans may still qualify for the ERC with respect to wages that are not paid for with forgiven PPP proceeds.
Other Qualification Standards
The CARES Act prohibits you from receiving the ERC for the SAME wages used for other credits:
- Wages for which you received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act (Phase II);
- Any wages you counted as part of the credit for paid family and medical leave under section 45S of the Internal Revenue Code;
- Wages paid to certain related individuals; or
- Any employee for whom you were granted a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code.
Under the CAA, 2021, this prohibition is also extended to wages affected by certain other credits including: the Research Activities Credit, Indian Employment Credit, Credit for Employer Differential Wage, and Empowerment Zone Employment Credit.
Meticulous record keeping is needed to avoid douple-dipping on qualified wages for the ERC and other tax credits.
The number of full-time employees you averaged in 2019 determines which employees you can claim for the credit, depending on the year.
For 2020, if you averaged more than 100 full-time employees, only wages for those you retained who are not working can be claimed. If you employed 100 or fewer workers, you can claim wages for all employees whether or not they are working.5
For 2021, the threshold is raised to 500 full-time employees, meaning if you employ more than 500 people, you can only claim the ERC for those who are not providing services. If you have 500 or fewer employees, you can claim the ERC for all of them, working or not.