don’t leave $$$ on the table: the new + improved employee retention credit
DISCLAIMER: Kelli Loo CPA is not a payroll specialist. All information below represents an interpretation of the CARES Act +Consolidated Appropriations Act 2021, and is not intended to be used as support or guidance for processing payroll. Contact a payroll specialist to utilize this opportunity.
What is the employee retention credit (ERC)?
The purpose of the ERC is similar to the PPP loan in that its to encourage employers to keep their employees off of unemployment due to the pandemic this year and continue paying them through wages.
It’s a large credit that can be up to $5k per employee in 2020 ($7k per quarter for Q1 & Q2 2021) and is refundable by offsetting employee taxes and credited towards future taxes or refunded immediately.
The credits are substantial and will help many small businesses in 2020 and 2021.
Why haven’t you heard of it?
Because until December 27th, 2020 if you received the PPP you were automatically disqualified for the credit. So everyone pretty much ignored it because the PPP was way more well known and most likely already applied for. But this is no longer the case, so everyone that received the PPP is still eligible and its generating a lot of savings!
In addition, the credit jumped to $7k per quarter and much easier to qualify for in 2021.
Who does it apply to?
This is only for businesses with employees, so unfortunately it doesn’t work for a schedule C with no employees.
For employers qualifications are different depending on the year and can be confusing and complex.
2020
If you had a government shutdown you’re eligible for that time period OR had a quarter with sales that dropped by at least 50% in comparison to the corresponding quarter in 2019.
Then every quarter following that is qualified until the end of the quarter where sales recover to 80% or more.
Huh??? I know right.
For example:
In this case,
Q2 qualifies because it drops at least 50%
Q3 qualifies because sales haven’t reached at least 80% yet
Q4 qualifies because although sales reached 90%, its the end of the quarter that finally surpassed 80% or more in sales.
You don’t have to tell us it’s confusing.
2021
For Q1 and Q2 the qualifications changed and are easier to be obtained. If you had a government shutdown you are eligible for that time period or follow the below requirements for the sales qualification…
Quarter 1 will qualify if:
Q1 2021 vs Q1 2019 sales dropped by at least 20%, OR
Q4 2020 vs Q4 2019 sales dropped by at least 20%
Quarter 2 will be a qualified quarter if:
Q2 2021 vs Q2 2019 sales dropped by at least 20%, OR
Q1 2021 vs Q1 2019 sales dropped by at least 20%
What is considered a government shut down?
Per irs.gov FAQs
Orders, proclamations, or decrees from the Federal government, or any State or local government are considered "orders from an appropriate governmental authority" if they limit commerce, travel, or group meetings due to COVID-19 in a manner that affects an employer's operation of its trade or business, including orders that limit hours of operation and, if they are from a State or local government, they are from a State or local government that has jurisdiction over the employer's operations (referred to as a "governmental order").
Governmental orders include:
An order from the city's mayor stating that all non-essential businesses must close for a specified period;
A State's emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and who may travel to and work at the workplace location;
An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period;
An order from a local health department mandating a workplace closure for cleaning and disinfecting.
Whether the operations of a trade or business are considered essential or non-essential will often vary from jurisdiction to jurisdiction. An employer should determine whether it is an essential or non-essential business by referring to the governmental order affecting the employer’s operation of its trade or business. For more information on when a business’s operations are considered to be fully or partially suspended due to a governmental order, see “Determining When an Employer’s Trade or Business Operations are Considered to be Fully or Partially Suspended Due to a Governmental Order.”
How much can you get?
So now that you know you have qualified quarters, what amounts are you eligible for?
Well there are a few items to clear up before being able to just claim it.
If you received PPP funds, you may not use payroll that you’ve already utilized PPP funds for. A simple PPP forgiveness tracker will help determine what is and isn’t earmarked for the PPP forgiveness.
If you received emergency sick pay or extended FMLA during qualified quarters you may not also use the same funds for the employee retention credit.
If you have over 100 employees, you can only receive credits for the wages that were paid out to employees who were NOT working. (For example: keeping servers on payroll even while the shut down is happening is paying workers to NOT work and would be qualified wages)
Okay, now that the above is out of the way…
In a qualified quarter in 2020, you would take the total wages paid out per employee and are able to receive 50% back up to $10k ($5k per employee). You can continue receiving the credit in 2020 as long as:
The quarter qualifies under the above rules
Wages have not exceeded $10k
For 2021, you may receive a 70% credit per employee up to $10k PER QUARTER. So that is a maximum of $7k per employee per quarter. That is pretty amazing.
How do you get it?
To receive the ERC for 2020, you have two options (and neither are great):
Amend the 941- If you amend you cannot utilize the form 7200, you can only request the refund on the 941 return itself.
File the entire years worth of ERC in Q4 2020 by the due date and fax form 7200.
Work with your payroll provider, or reach out to someone who does payroll in the directory to assist you.
To receive the ERC for 2021:
Include ERC when filing your payroll
To receive the credit and apply towards future quarters, record this on the form 941
To receive a refund of the credit immediately, complete the 941 as usual without requesting a refund, and fax the form 7200.
To sum up:
Work with a professional to analyze if this is available to you - since this is all ran through payroll start your provider, if you aren’t able to get assistance - check out our amazing directory for some great resources!
There is so much money on the table you don’t want to miss out!
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