As a small business owner, you undoubtedly know about the second-round of PPP loans that became available in the Covid-relief legislation that was passed at the end of last year. What you may not be aware of, however, are some important changes to the Employee Retention Credit (ERC) that could potentially save you thousands of dollars in payroll costs.
What is the Employee Retention Credit?
The Employee Retention Credit was passed as part of the CARES Act in 2020. For qualifying businesses with fewer than 500 employees, it was a 50% credit on $10,000 in wages paid to each employee in 2020, which could mean a maximum of $5,000 credit per employee. HOWEVER, in 2020, the ERC was not available to any company that received a PPP loan. The new Covid-relief legislation passed at the end of 2020 changed that, and you could benefit.
Companies that received a PPP loan in 2020 are now eligible for the ERC retroactively to March 12, 2020. The qualifying criteria are basically the same for 2020:
- Your business was shut down due to a government order related to Covid-19, or
- Your business suffered a downturn in revenues of 50% or more in any quarter of 2020 compared to the same quarter in 2019. Under these circumstances, your qualifying period for claiming the credit begins on March 12, 2020, or the first day of the first quarter that 2020 revenues were below 2019 by 50% or more, whichever is later. From that date, the qualifying period lasts until the first day of the first quarter that your 2020 revenues improved to 80% of 2019 levels or higher, or the last day of 2020, whichever is later.
- The Employee Retention Credit qualifying period is suspended for payroll costs incurred the period that was used or will be used to have your PPP loan forgiven. In other words, no double-dipping.
Importantly, the ERC is a credit taken against your company’s payroll tax liability. If the credit exceeds your quarterly payroll tax liability, you receive a refund of the remaining credit when you file your quarterly 941. To claim the credit for wages paid in 2020, you will want to contact your tax professional or payroll provider and ask them to file an amended Form 941.
How Do You Know if You Qualify for the Credit in 2020?
We recommend the following steps to determine if you qualify and if so, to claim your credit.
- Review your quarterly revenues in 2020 compared to the same quarter in 2019. Your qualifying period for the Employee Retention Credit begins on the first day of the first quarter that your 2020 quarterly revenues are 50% less than the same quarter in 2019 and ends on the first day of the succeeding quarter in 2020 where revenues are at least 80% of 2019 revenues for the same quarter. (If Q1 is the first quarter that your 2020 revenues fall below 50% of the 2019 level, only wages paid between March 12th and March 31st)
For example, assume 2nd, 3rd, and 4th quarter revenues in 2020 and 2019 were as follows:
2020 2019 2020 % 0f 2019 revenues
$40,000 $100,000 40%
$60,000 $100,000 60%
$82,000 $100,000 82%
Under these circumstances, your company could take an Employee Retention Credit on up to $10,000 in wages paid to each employee in the 2nd and 3rd quarters. (Note that the $10,000 in wages is the total for each employee for all of 2020. It does not reset at the beginning of each quarter.) In this example, Q4 does not qualify because 2020 revenues were not less than 80% of the 2019 level.
- Determine what wages in your qualifying quarters have been used (or will be used) for PPP loan forgiveness. You cannot use the same wages for PPP loan forgiveness and the Employee Retention Credit.
- File an amended Form 941 to claim the credit for $10,000 paid to each employee during the period in which you qualify, but do not include any wages paid during your PPP Loan Forgiveness period in 2020.
- You may be able to amend the 4th quarter Form 941 to claim the credit for the entire year. There’s some guidance out there that suggests this as a solution.)
But Wait! There’s More: Additional Employee Retention Credit Benefits for 2021
The new Covid-19 aid package extended the Employee Retention Credit to 2021, with some important additions:
- It extends the qualifying period for the credit through June 30, 2021
- It changes the credit percentage from 50% to 70% or $7,000 per qualifying employee for 2021.
- It changes the amount of lost revenue from 50% compared to 2019 to 20%. (In other words, you qualify for the ERC in 2021 in the first quarter that your 2021 revenues are less than 80% of what they were in 2019.)
- It renews the credit each quarter so that you can take a $7,000 credit for each employee in Q1, 2021, and again in Q2, 2021
If you receive a 1st or 2nd round PPP loan in 2021, you cannot receive an ERC for any wages used to have your PPP loan forgiven. (Your PPP Loan coverage period begins when your loan is granted and lasts for 8 or 24 weeks, depending on the length of your covered period.)
The 2021 Employee Retention Credit is taken when you file your quarterly 941 return, or you can ask your payroll provider to apply the credit contemporaneously to your payroll tax deposit. Any credit that exceeds your federal payroll tax deposit will be refunded after you file your quarterly 941. Taking the credit contemporaneously has risks, however. If your quarterly revenues exceed the 80% cutoff, you won’t have to pay a penalty for late deposit of payroll taxes, but you will have a large tax bill that will need to be paid immediately upon filing your 941. We’re hesitant to recommend such a strategy unless a business owner is certain that quarterly revenues will be far below 2019.