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An Easy Guide To the Employee Retention Tax Credit for 2020

March 1, 2021 | Carl Corneliuson
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    2020 was a year no business saw coming. The Covid-19 pandemic affected each business differently, but it became common for most to suffer in both profitability, and in employee compensation and retention. The recent Consolidated Appropriations Act of 2021 (CAA) provides relief to individuals and businesses that have been impacted by the pandemic, through an Employee Retention Tax Credit for employers. If you’re a small business, you may qualify to obtain this credit.

     

    What is the Employee Retention Credit for 2020, and how does it work?

    The Employee Retention Credit (ERC) under the CARES Act provides small businesses with relief so that they can keep employees on their payroll. The ERC is a fully-refundable tax credit equal to 50% of qualified wages up to a certain maximum. You’re probably wondering if your business is eligible for this credit, what wages are eligible, and even how to claim the Employment Retention Credit. We’ve answered these questions and more below.

    Who is eligible for the ERC?

    The company must have been in business in 2020 and meet at least one of the following conditions:

    Who is a small employer for ERC purposes?

    A small employer is defined as having 100 or fewer full-time equivalents (FTE) when claiming the 2020 ERC. A small employer is defined as having 500 or fewer FTEs in order to claim the 2021 ERC. In both cases, the reference period is 2019 employment. In other words, for 2021 ERC, the reference period is NOT 2020 FTEs. Affiliation rules also must be analyzed in computing the FTEs.

    What qualifies as a significant decline in gross receipts?

    For the 2020 ERC the quarterly revenue decline needs to be more than 50%. Employers would take their 2020 quarterly revenue and compare it to the same quarter for 2019.

    For the 2021 ERC the quarterly revenue decline has to be more than 20%. Compare 2021 quarterly revenue to the same quarter for 2019.

    What period(s) can a business claim the ERC for?

    If you are a small employer the ERC can be claimed on ALL employees.

    Wages paid to owners and spouses are eligible but not other related individuals. Family members such as siblings, children, parents, grandparents, etc. are ineligible for this credit. The IRS FAQ lists all the ineligible relationships.

    What wages are eligible for the ERC?

    This is generally gross wages plus employer health insurance costs. The maximum qualified wages are $10,000 per year, per employee for 2020 and $10,000 per quarter, per employee for 2021.

    Formerly, under the CARES Act, if an employer obtained a PPP loan, it could not benefit from the ERC employee at all. The CAA law changed this rule retroactively for 2020 and 2021 to require both PPP and ERC not be used on the exact same wages. Therefore, wages claimed on the PPP loan cannot be claimed for ERC.

    Also, wages claimed for emergency paid sick leave and emergency paid family and medical leave under the Families First Coronavirus Response Act (FFCRA) are not qualified wages.

    Can you get PPP loan and still qualify for the 2020 Employee Retention Credit?

    More IRS guidance on the interaction of PPP and ERC is needed, particularly when a business has already applied for or received PPP loan forgiveness. You should contact us to perform an analysis of the program interaction and your eligibility for ERC.

    How do you calculate the ERC?

    For 2020 the credit amount is 50% of qualified wages up to $10,000. This includes the entire year.  For 2020 the maximum credit per employee is $5,000.

    For 2021 the credit amount is 70% of qualified wages up to $10,000 per quarter. For 2021 the maximum credit per employee is $14,000. The 2021 ERC expires on June 30, 2021.

    How do you claim the ERC?

    The ERC is not an income tax credit, it is a payroll tax credit and is ultimately processed on Form 941, 941X and/or filing Form 7200 for an advance credit.

    Is the ERC refundable? Is the credit taxable?

    Yes to both. The ERC credit is fully-refundable and it is subject to income tax.

    Does ERC have to be paid back?

    The ERC does not need to be paid back. However, if your business received an advance of the credits, that amount would need to be accounted for when filing your federal employment tax return.

    More Questions?

    If you find yourself still having questions regarding the Employee Retention Tax Credit for employers, please contact the business accounting experts at Corneliuson & Associates. We’ll be more than happy to help you navigate this process.