Uncover Savings with the Employee Retention Credit
Throughout the COVID-19 pandemic, several loans and grant programs were available to help qualifying businesses and nonprofit organizations address working capital needs. One of the most popular economic relief programs has been the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) which has made $798B in loans to small businesses and nonprofit organizations. However, on May 4, 2021, the SBA announced that the PPP funds had been exhausted, leaving many New Jersey and Pennsylvania-area businesses and nonprofits to seek alternative funding options.
While there are other programs, the one which offers an immediate and compelling savings opportunity is the Employee Retention Credit (ERC). Originally passed as part of the CARES Act, the ERC provides a refundable tax credit to qualifying businesses. The ERC has been updated several times, including broadening eligibility and increasing credit value. To help clients, prospects, and others learn more about the credit, we have provided below the answers to a select number of the most commonly asked questions.
Who is eligible for the ERC?
A business or nonprofit organization that was carrying on a trade or business (using the same definition as under code section 162) in 2020 and meets one of the following three criteria:
- Full or partial suspension due to government order
- A significant decline in gross receipts, which is defined differently for 2020 and 2021.
- A recovery start-up business, which only applies to the third and fourth quarters of 2021.
It is important to note that self-employed individuals with no payroll do not qualify.
How is the maximum credit amount determined?
The credit for 2020 is equal to 50% of qualified wages, including allocable qualified health plan expenses, paid in a calendar quarter. The maximum amount of qualified wages which can be claimed in 2020 is $10,000, which means the maximum credit amount is $5,000 per employee. For the first and second quarters of 2021, the credit equals 70% of qualified wages paid in a calendar quarter. Therefore, the maximum amount of qualified wages is $7,000 per employee. Later the ERC was again modified to extend to the third and fourth quarters of 2021; however, the credit is against Medicare tax instead of social security tax. The credit for these quarters is also $7,000 per quarter, making 2021 a potential $28,000 credit per employee.
The 941 was already filed. Is it too late to claim the ERC? Can the credit be claimed early?
A business or organization that has already filed a 941 can:
- File an amended return to claim the credit within three years of the date the original 941 was filed.
To claim the credit early, a business can:
- File a form 7200 for the quarter that they want to take the credit for and submit the form before the due date of the quarterly 941. For example, the second quarter of 2021 should be filed before August 2, 2021. The business cannot be large, as defined in the second paragraph of the “What are qualified wages section” paragraph to take advantage of the advance credit.
What are qualified wages?
These wages include compensation and wages paid to all, or some, employees during the relevant calendar quarter. It is important to note that wages also include amounts paid to provide and maintain a group health plan, but only to the extent that the amounts are excluded from an employee’s gross income. In addition, qualified wages do not include compensation for qualified sick or family leave time off.
Specific circumstances in which payments are made will be considered qualified wages is determined, in part, by the average number of full-time employees during 2019 or 2020. For large employers with more than 100 employees, qualified wages are those paid to an employee not rendering services due to a full or partial shutdown due to a government order. For those with less than 100 employees, qualified wages are paid to an employee when a business is shut down due to government orders or when a significant decline in gross revenues occurs. For 2021 a large employer is defined as an employer with over 500 employees.
How do employers identify the number of full-time employees?
The term refers to an employee who worked an average of at least 30 hours of service per week, or 130 hours a month. For businesses that operated the entire year in 2019, full-time employees are determined by taking the sum of full-time employees in each month and dividing the total by 12. For businesses that started operations in 2020, the number is determined by totaling full-time employees and dividing by the number of months in operation.
Can employers that received a PPP loan claim the ERC?
A business that received a PPP loan may claim the ERC for wages paid to employees if the employer meets relevant eligibility criteria. However, it is important to note that those qualified wages claimed for the ERC must be excluded from payroll costs incurred during the covered period that otherwise qualify for PPP forgiveness.
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The Employee Retention Credit is a powerful tax savings opportunity available to qualifying businesses and nonprofit organizations in New Jersey and Pennsylvania. However, given the number of changes over the past six months, it is important to consult with a qualified advisor to assess and maximize your savings potential. If you have questions about the information outlined above or need assistance claiming the ERC, Klatzkin can help. Click here for additional information. We look forward to speaking with you soon.
©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.