How to Claim the Employee Retention Tax Credit

Congress created an employee retention tax credit to retain employees on their payroll during the pandemic. Recent updates to the incentive have made it even more appealing for businesses.

Originally introduced through the CARES Act, the employee retention credit (ERC) was extended in the Consolidated Appropriations Act (CAA) through June 30, 2021 and then again in the American Rescue Plan (ARP) through Dec. 31, 2021 as a way to provide businesses with additional time to adapt to continued pandemic-related challenges. Businesses can claim the reimbursement as a direct refundable payroll tax credit.

Starting on January 1, 2021, the ERC expanded eligibility to more businesses, increased the qualified wages threshold, and now allows businesses to claim the ERC in tandem with PPP loans.  

In addition:

• Certain governmental employers (e.g., state colleges, universities, hospitals) are now eligible for this credit.
• Certain businesses that were started in response to the pandemic may be able to claim the credit.
  

Eligibility Updates

Businesses must meet certain criteria to qualify for the credit. To be eligible, a business must have experienced either of the following: 

• The business was fully or partially suspended due to orders from the federal or state government limiting commerce, travel or group meetings due to COVID-19.
• The business experienced a 50% year-over-year decline in gross receipts during any quarter of 2020 or a 20% decline in the first two quarters of 2021 compared with the same period in 2019.

Small or Large Business?

If your business is eligible, the next step is determining whether you qualify as a small or a large business. The definitions of business size changed under recent legislation. For 2021, businesses with up to 500 full-time equivalent (FTE) employees are classified as small businesses. For 2020, businesses with 100 or fewer FTE employees were considered small businesses.

Qualified Wages Percentage Increase

Eligible small businesses that paid qualified wages in 2021 are able to claim a 70% credit per employee per quarter (maximum of $10,000 wages per quarter), an increase from 50% total qualified wages in 2020 (maximum of $5,000 wages per year). For example, if a business employs 20 people, it can claim up to a $560,000 credit in 2021 and $100,000 in 2020. 

For eligible large businesses, only wages paid to employees who were furloughed or not working qualify for the credit. Otherwise, the limits are the same: 50% for wages paid in 2020 and 70% for wages paid in 2021.

Wages paid to some employees who work at a level below their normal qualifications may also qualify.

If you are an owner of an S corp, you may be able to claim the credit for your own wages. Here’s how: If you hold 50% or less ownership in a corporation and are unrelated to the other owners, you may claim the credit against your own wages. You cannot claim the ERC if you own more than 50% of the corporation, either directly or by attribution if the owners are related parties.

Make the ERC and PPP Work for You

Recent legislation now allows businesses to take the ERC even if they borrowed PPP funds. This change is retroactive for wages paid after March 12, 2020. Keep in mind, there is no double dipping. Meaning, a business cannot use the same qualified wages for both the PPP and the ERC. In many cases, however, you may have additional wages that could qualify for a credit if the wages you paid to employees exceed your PPP forgiveness amount. Your advisor can help develop strategies to leverage the benefits of each incentive and find ways to enhance the savings of both. 

Let’s Start Calculating

This is simply a summary of some complex provisions that may affect how a business works with other relief programs. To make sure you’re making the best use of any programs for your business, be sure to contact me at jsheffield@bpw.com or (805) 963-7811 to help reduce your tax burden.