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Jennifer's Blog

 

Employee Retention Credits could be Beneficial if you qualify!

 

On March 12th, 2021, there was a provision made which allows business owners who applied for PPP to now qualify for the ERC and this credit will continue until 12/31/21.

 

Old ERC Rules (No longer valid)

  1. No ERC for businesses that received a PPP loan;
  2. Business must have essentially been forced to close from government Covid order, or saw revenues drop by 50% or more from the prior year’s equivalent quarter; and
  3. Business must continue to pay some employees other than owners and family members.

As you can see, rule 1 wiped out 75% of all businesses, and rule 3 wiped out the rest of them! The credit for 2020 maxed out at $5,000 per employee for the year.
 
ERC Rules that remained unchanged in CAA
The ERC was and is still not available for wages paid to owners or their family members-a distinct difference from the Sick Pay and FMLA credits.
 
The ERC is a payroll tax credit taken on or against 941 deposits or even potentially refundable. Wages that already received one of the sick or FMLA or WOTC credits do not also qualify for the ERC amount.
 
New ERC Rules or guidance
For 2020-the PPP restriction has been revoked, retroactively. Any business that met rule 2 or 3 in 2020 can amend the applicable quarter 941 for 2020 or even deem the ERC qualified wages as paid in the 4th quarter of 2020. The $5,000 annual credit max per employee for the year remains unchanged.
 
For 2021 it is even simpler because rule 2, for 2021 revenues only, only requires a 20% reduction in gross revenues from the applicable 2019 quarter, and, under a special rule on page 4935 of the CAA, the business can elect to apply the 20% reduction test to the immediately preceding quarter instead of the prior year’s equivalent quarter. There is no guidance yet how to make that election. Wages now qualify through 6/30/2021.
 
The $5,000 annual credit max per employee for 2020 wages has been dramatically and incredibly modified. The new credit rate for 2021 wages and health insurance (only) is 70%, and it is per quarter, per employee at $7,000 maximum per employee, or as much as $14,000 per employee for the 2 remaining allowed 2021 quarters. No, we do not think Congress understood what they did here either.
In summary for 2021, if revenues dropped by 20% from the equivalent 2019 quarter (Act Sec. 207(d)(1)(A)), or the (by election) immediately preceding quarter, the employer qualifies for the ERC on the remaining first 2 quarters of 2021 wages, except for owners. There is probably no PPP forgiveness worry since most of that occurred in 2020, and health insurance costs can be used to get wages increased if necessary to the maximum qualified ERC credit wage amount of $10,000 per quarter, per employee.
 
Wages used for PPP forgiveness do not also qualify for ERC, but the taxpayer can choose the wage amounts and wages to eliminate from the PPP by keeping good internal records of the allocation of wages to PPP forgiveness, Sick pay, and FMLA pay.
 

 

Old Law

New Law 2020

New Law 2021

PPP Loan

Not Allowed

Allowed Retroactive

Allowed

Credit Rate

50%

50%

70%

Wage Period

3/12-12/31/20

3/12-12/31/20

01/01-12/31/21

Wage Limit

Annual

Annual

Quarterly

Max Credit

$5000 EE Annual Max

$5000 EE Annual Max

$7000 EE Per Qtr

Allowed even if used in 2020

Qualified Gross Receipts Reduction

50%

(Same 2019 qtr)

50%

 (Same 2019 qtr)

20%

(Same 2019 qtr or election

Working EE

<100 EE

<100 EE

<500 EE

Advance Credit pymt?

NO

NO

YES