Employee Retention Credit FAQs

Apr 8, 2021Accounting, Business, Business Tax, Covid-19

WHAT IS THE EMPLOYEE RETENTION CREDIT & HOW TO CLAIM IT FOR 2021

The employee retention credit (ERC) was first introduced with the CARES Act in 2020, and subsequent tax bills have made the credit more widely available to businesses. This credit has the potential to result in significant refunds – up to $28,000 per employee in 2021. Learn more below from frequently asked questions we hear from our clients:

1.Which employers are eligible for ERC?
Businesses subject to a full or partial suspension due to government order, or who experience a significant decline in gross receipts.

2. What is a significant decline in gross receipts? 
The quarterly revenue decline must be more than 20 percent. Compare the 2021 quarterly revenue to the same quarter of 2019. Special rules are available for new businesses that started in 2019 or 2020.

3. How much is the credit?
The maximum credit is $7,000 per employee per quarter. The credit is calculated based on 70 percent of qualified wages up to $10,000.

4. What are qualified wages?

  • Gross employee wages plus employer health insurance cost.
  • Certain related parties and owners may be limited or ineligible for the credit.

5. Is there a difference between small and large employers?

  • Yes – small employers for 2021 had an average of 500 or fewer employees in 2019.
  • Small employers are eligible for the ERC on qualified employee wages.
  • Large employers are only eligible for ERC on qualified wages paid to employees not to work.

6. How long can a business claim the ERC?
This depends on how the business meets the eligibility test. For a credit based on a government shutdown order, the employer is eligible for the credit for wages paid during the shutdown period.

For a credit based on a revenue decline, the business is eligible for the quarter in which they had a decrease in revenue and through the end of the quarter in which revenue returns to an amount of 80 percent or more of 2019 revenue for the quarter. (Effectively, meaning that a business that qualifies for quarter one automatically qualifies for quarter two).

7. How is the ERC claimed?
The ERC is a payroll tax credit, not an income tax credit, and is claimed on Form 941Form 943, or Form 944, depending on the employer type.

8. What if the employer already filed Form 941 for the 1st quarter of 2021?
The ERC could be claimed on a Form 941-X if the original return was filed before determining eligibility.

9. Can businesses that applied for PPP second draw also claim the ERC?

  • Yes – employers can utilize both programs.
  • The wages paid to employees can be applied to either PPP or ERC, but not to both.
  • Employers eligible for other credits such as Work Opportunity Tax Credit, research and development credit, or others will not be able to include wages used on ERC for calculation of these credits.

10. Is the credit taxable?
Yes – ERC is subject to income tax because the credit reduces the amount of wage deduction.

OTHER IMPORTANT NOTES

Eligibility criteria for the 2020 ERC are slightly different from the criteria for 2021, as follows:

  • A 50 percent reduction in gross receipts is required for 2020.
  • The maximum credit is $5,000 per employee for the entire year. The credit is 50 percent of wages up to $10,000.
  • The small vs. large employer threshold is 100 employees.

Employers who have not yet applied for forgiveness on their PPP loan should consider whether they meet the ERC criteria for 2020. Smith Schafer can help you leverage the ERC and PPP opportunities and make the best decision for your company. We are here to help.

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