Employee Retention Credit Extended and Enhanced: Here’s How to Claim ItMarch 11, 2021
Be skeptical of outside vendors when looking to claim the ERC. Claiming the credit may better be handled by your payroll provider. Here’s why.
*Editor's Note: This blog has been updated as of March 11, 2021.
Do you qualify for the Employee Retention Tax Credit (ERC)? Did you receive an email promising big refunds based on changes in the law that allow for retroactive refunds from 2020? Be skeptical. Claiming this credit is more likely best handled by your payroll provider, since the credit is claimed on the quarterly Forms 941. Here’s what you should know.
What is the ERC?
The Employee Retention Tax Credit (ERC) is a refundable tax credit applied against certain employment taxes (Social Security, Medicare, etc.) of qualified wages an employer pays to its employees. The credit was originally set to expire on January 1, 2021 but is now extended to December 31, 2021. There is potential opportunity for many businesses to benefit, especially if they aren’t getting a PPP2 loan.
What did the latest relief package change?
The CARES Act stipulated that if a business took advantage of PPP loan forgiveness, it was ineligible to take the ERC. The new relief act retroactively eliminates this limitation and allows for both provisions to be utilized, but not on the same wages.
Also, the ERC has been enhanced under the new act. For 2020, the credit covers up to 50% of qualified wages paid by the employer—up to $10,000 in wages or health care expenses per employee (paid between March 13 and December 31, 2020), for a total available credit of $5,000 per employee. For 2021, the credit covers up to 70% of eligible wages paid by the employer—up to $10,000 per employee per quarter for 2021, for a total available credit of $28,000 per employee.
The Relief Act also increases the threshold used to determine large employer status to an employee count of more than 500 (it was previously more than 100).
You have to be careful if you received a 1st PPP loan, because you can’t double dip on the same wages. The wages paid during the PPP covered period cannot be used when determining if there is eligibility for the Retention Credit. For wages paid outside of the covered period, there may be some opportunity.
How do you qualify for the credit?
There are 2 ways to qualify for the credit –
- The 1st criteria – did you experience a “full or partial suspension of operations during any calendar quarter because of governmental orders limited commerce, travel or group meetings due to COVID”.
- The 2nd criteria - did you have at least a 50% decline in gross receipts in any quarter in 2020 compared to the same quarter in 2019 (20% in 2021 when compared to 2019) .
Many businesses may qualify under the full or partial suspension. Check out this link to see if any of these examples might apply regarding the “fully or partially suspended operations due to a government order”:
If you do meet at least one of these conditions and the company is eligible for the credit for 2021, we recommend you talk to your payroll company to get this set up so that the credit will flow through the quarterly Forms 941. (But note again, you cannot claim the credit for wages that were paid for with PPP loan funds for which you are granted forgiveness. No double dipping.) This will mean the payroll company will pull less payroll taxes from your bank account when running the payroll. That’s how you get the benefit. This credit has been extended through December 31, 2021. So, all of 2021 wages could potentially qualify.
Can you request retroactive refunds?
There is the possibility that you can go back to 2020, based on the newest tax law changes, to request refunds if there were wages that qualified for the credit outside of the PPP-1 covered period. There has been some indication that the IRS may provide guidance for a simplified process for seeking a retroactive credit. The alternative is to file amended quarterly payroll tax forms 941 for the applicable quarters. For now, our advice is to wait to see if additional guidance comes out for 2020 refunds, unless your payroll company has a simplified process to file the amended 941s already in place for this situation.
The best place to start is to speak to your payroll company to see if they have a system set up for both 2020 retroactive requests and for 2021.
Do you need guidance on claiming the ERC? Contact us, we can help.