The Employee Retention Credit (ERC), introduced with the CARES Act, is a way for professional service firms to recoup wages paid to employees. Does your firm qualify?
The ERC is a fully refundable tax credit and is filed through the employer’s quarterly payroll tax returns (Form 941). There may be an opportunity for professional service firms to claim the ERC in 2021. Here is what you need to know:
CLAIMING THE EMPLOYEE RETENTION CREDIT
WHICH BUSINESSES ARE ELIGIBLE FOR THE ERC?
Professional service firms operating in any calendar quarter of 2020 or 2021 may claim this credit if they meet one of the following:
- Fully or partially suspended business operations due to governmental orders limiting commerce, travel, or group meetings due to COVID-19.
- The business experienced a significant drop in gross revenue for any calendar quarter in 2020 or 2021 when compared to 2019. For 2020, the revenue reduction requirement was 50%, for 2021 the requirement is a 20% reduction.
Example: Minnesota courts suspended trials and in-person hearings during the pandemic. If a law firm practices in the courts, it may have experienced partially suspended business operations.
Our ERC experts can work with you to determine what quarters can be used to determine qualifying wages for the ERC.
AMOUNT OF ERC
- For 2020, the credit is 50% of all qualified wages you paid employees between March 12, 2020, and December 31, 2020. The wage limit is $10,000 per employee for all quarters. The maximum ERC for all of 2020 would be $5,000 per employee.
- For 2021, the credit is 70% of all qualified wages you pay employees from January 1, 2021, through December 31, 2021. The wage limit is $10,000 per employee per quarter. Therefore, you could claim $7,000 for each employee in every quarter. The maximum credit is $28,000 per employee.
CLAIMING THE CREDIT
Although the ERC is expiring at the end of 2021, there is still time for eligible professional service firms to claim the credit. The ERC is not an income tax credit. Instead, it is a payroll tax credit and is reflected on Form 941. Professional service firms that anticipate qualifying for the credit can reduce the amount of payroll taxes deposited to the IRS for that quarter.
Note: If you already filed Q1 and Q2 2021 payroll returns, you can amend your Form 941 filing and still get the credit.
WHAT ARE THE NEXT STEPS?
The rules are complex, and we recommend consulting an ERC expert to navigate this tax credit. Please reach out to us if you would like more information on whether you qualify for the ERC. Our experts can assist you with running the calculation, documenting partial shutdown, and claiming the credit for eligible quarters. We can help you leverage this opportunity and make the best decision for your professional services firm.