Employer Retention Credit – What You Need to Know

Back in 2020, while COVID was raging on, Congress passed the Cares Act in order to provide relief for those businesses and individuals suffering from the negative effects that COVID was having on our economy. Within the Cares Act there was a credit called the Employee Retention Credit (ERC). The credit provided for a 50% retention credit for “qualified wages” paid by an “eligible employer” between March 13th and December 31, 2020. One condition of the ERC was that if a business applied for and received a Payroll Protection Program loan, the business could not take the ERC. For this reason, most businesses did not give the ERC a second thought and applied for the PPP.

On December 21, 2020 the Consolidated Appropriations Act, 2021 was passed. Within that Act, updates were made to the ERC in addition to extending it into 2021. Below are a few things you need to know about the Employer Retention Credit.

1. What is an “eligible employer”?

• Must meet one of 2 tests:
  • Businesses must have had operations that were fully or partially suspended by a COVID-19 governmental order or during the period of the order’s enforcement
    • Here is a link to a FAQ from the IRS providing examples of what qualifies as fully or partially suspended business operations. https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-when-an-employers-trade-or-business-operations-are-considered-to-be-fully-or-partially-suspended-due-to-a-governmental-order-faqs
    • In summary, businesses such as restaurants, retail and other stores that had to adjust their operations (i.e. provide outdoor dining, provide for pickup services, etc) would normally qualify as fully or partially suspended.

• • OR

• • Had a decrease in gross receipts of 50% or more for the same quarter in 2019. This is for qualifying for the 2020 credit.
    • For 2021, the decrease in gross receipts is 20% or more compared to 2019 gross receipts for the same quarter.

• For 2020, there is a 100 employee threshold in order to qualify for the credit for working employees.
  • If a business had 100 employees or less, then the credit can be claimed on wages paid to employees who provided services to the company and employees who didn’t provide services to the company.
  • If a business had more than 100 employees, then the credit can only be claimed on wages paid to employees who didn’t provide services to the business.

• For 2021 the threshold is 500 employees.

2. What are “qualified wages”?

• The 2020 credit is up to 50% of wages, limited to a $5,000 credit or $10,000 of wages per employee annually.
• The 2021 credit is up to 70% of wages up to $10,000 of wages or $7,000 of credit per employee per quarter; for a potential of $14,000 of credit per employee.

3. The 2021 credit was extended until June 30, 2021.

4. For the 2020 credit, a business can’t use the same wages for both the PPP loan forgiveness and the ERC. If a company had excess payroll over and beyond its PPP loan, then the business may potentially qualify for the ERC.

5. Employers may retroactively claim the 2020 credit on their 4th Quarter form 941 due January 31, 2021.

6. For additional resources, please see link for a video prepared by RSM discussing the updates to the Employee Retention Credit. https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act

7. The credit is claimed when you file Form 941 or 943 for the quarter. See link for additional guidance. https://www.irs.gov/coronavirus/employee-retention-credit

With the recent changes to the Employer Retention Credit for 2020, we believe more businesses can potentially qualify for this credit. The information above is a summary of the Employee Retention Credit and does not contain all information needed to determine if you qualify for the credit. We recommend discussing your particular facts and circumstances with your payroll provider or Michelle Hanks at Isler CPA.