What is the Employee Retention Credit (ERC)?

The Employee Retention Credit (ERC) is a tax credit available for small business owners, LLC’s, S-Corps or 1099 employees. Similar to the $1,200 stimulus check taxpayers received, this credit is designed to help small businesses during these trying times.

The ERC is not a loan, it’s a tax credit, meaning that it does not have to be repaid. In the first stimulus, businesses were only allowed to claim one of the PPP or the ERC, not both. That rule has been changed, and now businesses can claim both funding opportunities, providing much-needed relief and help.

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Qualification:
  • Section 2301 of the CARES Act allows a credit against application employment taxes for eligible employers
Eligible Employers:
  • Any employer carrying a business during calendar year 2020 and with respect to each calendar quarter:
  1. Operations were fully or partially suspended due to government orders limiting commerce, travel, or group meetings due to COVID-19 or;
  2. Employer had significant decline in gross receipts

A. 2020 Significant Decline – 50% decline when comparing each 2020 calendar quarter to same quarter in 2019 (the significant decline ends when the calendar quarter gross receipts are at least 80% of the same quarter in previous year)

  • Employers who did not exist in 2019 can use the corresponding 2020 quarter

B. 2021 Significant Decline – 20% decline when comparing each 2021 quarter to  corresponding 2019 quarter or can compare to preceding quarter (i.e. Q1 ‘21 vs Q4 ‘20)

  • Tax exempt entities (501(c)) should examine section 6033 of the Code to determine the definition of a significant decline in gross receipts.
  • 2021 Update: For Q1 and Q2 2021 employers can measure the significant decline in gross receipts against the previous quarter (Q1 2021 can be compared to Q4 2020 instead of Q1 2020)
ERC Credits are not taxable
  • 2020 Qualified Wages – Wages paid after March 12, 2020 and before January 1, 2021
  • 2021 Qualified Wages – Wages paid after December 31, 2020 (Section 207) and before July 1, 2021
Qualified Wages:
  • Any wages paid by an employer (with fewer than 100 employees in 2019) who maintains group health plan including health costs paid by employee and employer provided costs are pre-tax, sick leave and family leave under sections 7001 and 7003 of the FFCRA
Exclusions:
  • Any wages disclosed and approved for under the Paycheck Protection Program Forgiveness are excluded from the ERC calculation
  • Wages paid to the business owner and their related parties
Max Tax Credits:
  • 2020 Credits – 50% up to $10,000 per employee per year = $5,000 per employee per year
  • 2021 Credits – 70% up to $10,000 of qualified wages per employee per Quarter = Maximum of $28,000 per employee per year
  • If credits are in excess of applicable employment taxes, the excess will be treated as overpayment and refunded to the employer
How to Claim:
  • Form 941 due 30 days after Q end – need to file amended form thereafter
  • Form 7200 – file in anticipation of receiving credits under the ERC

2020 Filing – Deadline has passed and any related forms will not be processed. However, an Eligible Employer can file form 941-X (mailed to IRS) Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund

Needed Documentation

How Do I Know If I Qualify?

The IRS will be looking for your business to meet one of two key factors to qualify for the ERC:

A decrease in revenue over a specified quarter. To retroactively claim the credit for 2020, you must show a decrease of 50% or more over any given quarter. For 2021, you only need to show a 20% decrease in revenue, and if this revenue decrease happens in both Q1 & Q2, you can claim the ERC twice.

A “Full or Partial” Closure of your business. This can include local governmental restrictions or mandates restricting the number of employees or customers in your workplace, disrupted operations (keeping 6 feet from clients), being forced to work from home, or completely closing your business operations for an extended time period.

Your business only needs to fit under one of the above restrictions in order to qualify for the ERC.

 

The Employee Retention Credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that Eligible Employers pay their employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021.

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 CARES Act Consolidated Appropritions Act and Notice 2021-20The American Rescue Plan Act of 2021
Timeframe of Qualified WagesPaid from March 13, 2020 through Dec. 31,2020Extends CARES Act timeframe through June 30, 2021July 1, 2021 - Dec. 31, 2021
Eligible Employers Businesses with operations that were wither fully or partially suspended by a COVID-19 governmental order and only during the period the order is in force; or Gross receipts were less than 50% of gross receipts for the same quarter in 2019 until such quarter as gross receipts are 80% of the same quarter in 2019.
Business that were not in existence in 2019 could use a comparison to 2020 for purposes of the credit.
Government entities were not eligible.
Businesses with operations that are either fully or partially suspended by COVID - 19 governmental order and only during the period the order is in force; or
Gross receipts are less than 80% of gross receipts for the same quarter in 2019.
Businesses that were not in existence in 2019 may use a comparison to 2020 for purposes of the credit.
All in the Consolidated Appropriations Act/Notice 2021-20, plus:
-Recovery startup business
-Severely financially distressed employers
ERC Amount 50% of qualified wages 70% of qualified wages 70% of qualified wages
Maximum Credit Allowed $5,000/year per employee $7,000/quarter per employee (up to $14,000 through June 30, 2021)$7,000/ quarter per employee (up to $14,000 from July 1-Dec.31, 2021); or
$50,000/quarter for recovery startup business (total, not per employee)
Recipients of PPP Loans Not eligible REPEALED: Recipients of PPP loans eligible as of Dec. 27, 2020Eligible, but credit cannot be claimed for costs covered by forgiven PPP loan amounts Eligible, but credit cannot be claimed for costs covered by forgiven PPP loan amounts
Taxes offset by ERCEmployer share of social security tax only Employer share of social security tax only Employer share of medicare tax only

Source: https://www.jmco.com/new-guidance-for-claiming-erc/

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