How To Benefit From The Employee Retention Credit In 2021

What is the Employee Retention Credit?

As a result of the coronavirus pandemic the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contained a business relief provision known as the Employee Retention Credit (ERC). The Employee Retention Credit is a refundable tax credit against certain employment taxes on qualified wages an eligible employer pays to employees after March 12, 2020.

The goal of the ERC was to encourage employers to keep employees on the payroll, even if they were not working during the covered period due to the effects of the coronavirus outbreak.

The Consolidated Appropriations Act

As the pandemic and the economic impact marched on through 2020, the Taxpayer Certainty and Disaster Tax Relief Act (TCDTR) of 2020 was also passed to provide further relief. This act was part of the Consolidated Appropriations Act (CAA), 2021 and it was signed into law Dec. 27, 2020. This new act significantly modified and expanded provisions of the ERC including wages paid in the first half of 2021.

How the Consolidated Appropriations Act (CAA) Changed the ERC

• The ERC credit rate per employee is increased to 70% of qualified wages (from 50%) and the per-employee wage limit is increased from $10,000 for the year to $10,000 per quarter for 2021. Again, the maximum credit amount per employee per quarter is $7,000. The credit reduces your employer Social Security tax liability.
• Your eligibility as an employer is based on gross receipts of less than 80% (versus less than 50%) when compared to the same quarter in 2019. This means if your gross receipts decline more than 20% in 2021, you are eligible to take the credit.
• You can elect to use the immediately preceding calendar quarter (i.e., Q4 2020 and Q1 2021) instead of Q1 and Q2 2021, respectively, compared to the same quarter in 2019 to determine eligibility.
• If your company did not exist in 2019 you may compare 2021 quarterly gross receipts to the same 2020 quarters to determine eligibility.
• For 2021 the definition of large employer changes from more than 100 to more than 500 employees which allows you to use a broader definition of qualified wages if you fall within that threshold. In short, you can count wages paid to both active (working) employees and those not providing services.
• The CAA also removes the limit on qualified wages defined as no more than the employee would have received in the 30 days before the qualifying period. Now, for example, you can take the ERC if you pay a bonus to an essential worker.
• If you have fewer than 500 full-time equivalent employees, you will be allowed advance ERC payments during the quarter in which the wages were paid to those employees. This includes seasonal employers and part-time employees, and employers not in existence in 2019.
• If you received a PPP loan, you may still qualify for the ERC for any wages not paid with proceeds from the forgiven portion of your PPP loan.
• The Consolidated Appropriations Act clarifies how qualifying tax-exempt organizations determine “gross receipts.”
• Group healthcare expenses are considered “qualified wages.” This is true even if no other wages are paid to that employee.

Does the employee retention credit have to be paid back?

You do not have to repay the Employee Retention Credit. However, if you receive an advance of the credits (using Form 7200), you’ll need to account for that amount when filing your federal employment tax return.

How do you qualify for employee retention credit?

In short, your eligibility as an employer is based on gross receipts of less than 80% when compared to the same quarter in 2019. This means if your gross receipts decline more than 20% in 2021, you are eligible to take the credit.

How do you qualify as an “Eligible Employer”?

Whether you qualify as an “Eligible Employer” depends on the time period in question.

For the period March 13, 2020, through Dec. 31, 2020, you must have carried on a trade or business, or were a tax-exempt organization that:

• Was partially or fully suspended due to COVID-19 orders from an appropriate governmental authority
• Experienced a significant decline in gross receipts, defined as less than 50% of gross receipts for the same calendar quarter in 2019

• If you were self-employed, you are not eligible for the 2020 ERC for your own wages but if you employed other people, you may qualify for the ERC wages paid to those employees.

For the period Jan. 1, 2021, through June 30, 2021, you must have carried on a trade or business or were a tax-exempt organization that:

• Was partially or fully suspended due to COVID-19 orders from an appropriate governmental authority
• Experienced a significant decline in gross receipts defined as less than 80% of gross receipts for the same calendar quarter in 2019

• If you were not in business in 2019, you can use 2020 as your comparison year.
• If you are self-employed, you are not eligible for the 2021 ERC for your own wages. But if you employ other people, you may qualify for the ERC wages paid to those employees.

The “significant decline in gross receipts” test for both 2020 and 2021 applies whether your business was affected by COVID-19 or not.

How do you calculate the employee retention rate?

To calculate your employee retention rate, divide the number of employees on the last day of the given period by the number of employees on the first day. Then, multiply that number by 100 to convert it to a percentage.

Can owners take employee retention credit?

Certain S corporation owners may claim the credit for their own wages, but there are restrictions

Can the ERC pay for Unforgiven PPP Loan proceeds?

The fact you received a PPP loan in 2020 does not preclude you from claiming the ERC for qualified wages that were not counted as payroll costs in order to obtain forgiveness of all or part of your PPP loan. Further, if you included wages paid in Q2 and/or Q3, 2020 on your forgiveness request and your request was denied, you can claim those wages on your Q4 2020 Form 941 due Jan. 31, 2021.

How to Get the ERC for Wages Paid in 2021

The process for obtaining the ERC for 2021 is expected to be similar to 2020. Also, just like in 2020, you can obtain your ERC for Q1 and Q2 2021 by reducing your employment tax deposits. If you qualify as a small employer (500 or fewer full-time employees in 2019) you may request advance payment of the credit using Form 7200, Advance of Employer Credits Due to COVID-19. In 2021, advances are not available for employers with more than 500 employees.