How to Reap Big Tax Savings with the Employee Retention Credit

Key insights:

  • The employee retention tax credit was originally conceived in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
  • Since then, the tax credit has been updated by the Taxpayer Certainty and Disaster Relief Act of 2020 and the American Rescue Plan Act (ARPA).
  • Currently, businesses can potentially claim a tax credit of up to $33,000 per employee.

The coronavirus pandemic had a severe impact on many businesses in 2020. Many still feel the effects today. If your business had to shut down or reduce hours due to a government order or had a decline in gross receipts, you may qualify for the employee retention credit.

Here’s a general overview of what you need to know to take advantage of this updated tax credit, which may significantly lower your federal quarterly payroll tax bill.

What is the Employee Retention Credit?

Congress originally established the Employee Retention Credit (ERC) as part of the CARES Act. Its goal was to help employers facing certain negative impacts from the coronavirus pandemic retain their employees and keep them on the company’s payroll. The tax credit has since been extended and expanded by the Taxpayer Certainty and Disaster Relief Act of 2020 and ARPA.

How does the ERC work?

The details of how the employee retention credit works vary slightly depending on the time period you’re taking the credit for.

Businesses may qualify for the employee retention tax credit in two ways. One of these two qualifying factors must apply for the quarter the credit is being claimed:

  1. The first qualification factor requires your business to have partially or fully shut down or had to reduce their business hours because of a government order. In this case, you only qualify for the credit when the business was not in operation. The credit does not apply to the entire quarter.
  2. The other method to qualify for the credit is based on your business having a substantial decline in gross receipts for a quarter. Depending on the particular quarter, this definition varies.

Quarters

March 13, 2020, through December 31, 2020

Quarterly receipts must drop below 50% of gross receipts in the same quarter in 2019. Eligibility stops when receipts in the next calendar quarter exceed 80% of gross receipts in the same quarter in 2019.

January 1, 2021, through June 30, 2021

Starting in 2021, gross receipts for a quarter must drop by more than 20% compared to the same quarter in 2019 instead of the more than 50% threshold previously used.

July 1, 2021, through December 31, 2021

Businesses can use the same requirements as the January 1, 2021, through June 30, 2021 period but have an additional option. Companies can use gross receipts in the previous calendar quarter to determine the more than 20% decline instead of the same calendar quarter in 2019.

Qualifying wages

For the 2020 tax credit, wages that qualify change based on the number of full-time employees the business had in 2019.

Businesses that averaged more than 100 full-time employees in 2019

Qualifying wages are wages paid to employees that did not provide services due to suspended operations or a decline in gross receipts. This includes certain healthcare costs. This is limited to what an employee would have been paid based on their duration of work in the previous 30 days before the hardship.

Businesses that averaged fewer than 100 full-time employees in 2019

Use the same suspended operations or decline in gross receipts guidelines. The difference is employees could have provided services and still qualify for the credit.

The 2021 version of the tax credit increases the 100 employee threshold to 500 employees.

What’s the maximum amount of the credit?

The maximum employee retention credit a business can claim under current law is $33,000 per employee. It breaks down as follows:

  • Up to $5,000 per employee from the CARES Act
    • Calculated as 50% of up to $10,000 of qualifying wages from March 13, 2020, through December 31, 2020
  • Up to $14,000 per employee from the Taxpayer Certainty and Disaster Relief Act of 2020
    • Calculated as 70% of up to $10,000 of qualifying wages per calendar quarter from January 1, 2021, through June 30, 2021.
  • Up to $14,000 per employee from ARPA
    • Calculated as 70% of up to of qualifying wages per calendar quarter from July 1, 2021, through December 31, 2021

How can my company claim the ERC?

Your company can claim the employee retention tax credit by reducing the amount of employment payroll tax deposits made on Form 941. If the credit is larger than the employment tax required, your business can request an advance credit using Form 7200, Advance of Employer Credits Due To COVID-19.

You may want to consult these helpful resources:

Need assistance with the ERC? We can help.

As always, tax laws have plenty of exceptions and intricacies that may qualify or disqualify your business from claiming this credit. Our team of accounting and tax advisors can help determine whether you qualify for the ERC and other opportunities to minimize your taxes. Please contact our Tax services team to get assistance or if you have questions about how this tax credit could benefit your business.

Sources: IRS, Paychex

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