By Tim Moore
In the dynamic world of taxes, few areas have been more unpredictable in the last year than the Employee Retention Credit (“Credit” or “ERC”). One of the mechanisms created by Congress to help businesses and employees during the pandemic, the ERC underwent multiple changes since its introduction under the CARES Act in March of 2020. As we come to the end of the first quarter of 2021, it is important to understand how the Credit can benefit your business this year.
Eligibility for the Credit in 2021
To be eligible for the ERC in 2021, a business, which includes exempt organizations, will need to show either that (1) the business was subject to governmental orders that resulted in full or partial suspension of operations, or (2) the business experienced a 20% decrease in gross receipts during a calendar quarter compared to the same calendar quarter of 2019. Alternatively, a business can meet the gross receipts reduction by looking at 4th quarter 2020 compared to 4th quarter 2019.
Employers with 500 or fewer employees can claim a credit for wages paid to all employees, even if those employees continue to provide services. The credit amount is 70% of the first $10,000 of qualified wages per employee ($7,000 credit per quarter for each eligible employee). Employers with over 500 employees are only able to claim the credit for wages paid to employees who are not working.
Congress Giveth and Congress Taketh Away
As with most tax benefits, there are collateral effects that are not immediately evident. The ERC has more than its share of such consequences. First, tax law abhors double benefits and, as a result, deductible wages (and associated health plan costs) are reduced by the amount of any Credit received.
Second, if the business also took out a PPP loan in 2021 (or still intends to do so) it must allocate the wages between the two benefits as you cannot use the same wages for PPP forgiveness and the ERC. It is important to keep in mind that while wages used to claim the Credit are reduced by the Credit received, those used as a basis for forgiveness of a PPP loan continue to be deductible.
Time to Take the Credit
After the American Rescue Plan Act of 2021 was passed, the ERC was made available for the 1st -4th quarters of 2021. The Credit can be taken on the business’ 941 filed each quarter, or on an amended 941-X if you are applying for the credit after initial 941 was filed. One of the most important features of the Credit is that it is “refundable”, which simply means that if the taxpayer has not paid in, or is not obligated to pay in, as much payroll tax as the amount of the Credit, it may claim a refund for additional Credit. That refund will provide much needed funds to the taxpayer to help cover wages and other business expenses.
This article focuses on the 2021 treatment of the employee retention credit, but please note that in January 2021 the Consolidated Appropriations Act opened up the employee retention credit for 2020 to businesses and nonprofits that had previously received a PPP loan. The 2020 rules for the employee retention credit are different than the rules for 2021, in that the credit is limited to $5,000 annually, per employee.
This is a brief overview of a tremendously complicated area of new tax law. Tax professionals still grapple with unanswered questions and gray areas in the rules. That said, the financial benefit of a proper application of the ERC can be the difference between survival and failure for many businesses and should be considered carefully whenever eligibility is even remotely likely. If you have questions on whether you are eligible for the Employee Retention Credit in 2021, please reach out to Snyder Cohn.