Don’t Miss Out on Employee Retention Credits

Published on Tuesday, January 19, 2021

Over the Holidays, the Consolidated Appropriations Act, 2021 was signed into law, opening the doors for many businesses to claim the Employee Retention Credit (ERC) who were previously deemed ineligible, and expanded the credit into the 2nd quarter of 2021. Businesses that qualify can claim an ERC for wages paid during an eligible period/quarter of up to $5,000 per employee in 2020, and up to $14,000 per employee in 2021. The fully refundable credit is available against an employer’s share of Social Security tax on employee wages.

To illustrate, if an employer’s quarterly social security obligation was $100,000, and the ERC earned during that quarter was $120,000, the excess $20,000 is returned to the employer, either as a cash refund, or may be applied to the business’ future payroll tax liabilities. Previously, if a small business received a Payroll Protection Program (PPP) loan, that business would be completely barred from claiming the ERC, but the Consolidated Appropriations Act has eliminated that restriction. Although wages paid with PPP funds cannot be used to calculate this credit, opening the credit to business who have previously received PPP funds may still amount to thousands of dollars in previously unclaimed and future credits for many Treasure Valley Businesses.

Although this may sound like credits falling out of the sky, there are certain limitations and qualifiers which need to be considered. The first being, whether a business has any eligible period/quarters, which is the period in which wages paid can be used to calculate a business’ ERCs (assuming they were not paid with PPP funds, as mentioned above). For 2020, an eligible period/quarter is either a period in which your business experienced a mandated government shutdown/partial suspension, or a 50% or higher drop in revenue in a calendar quarter in 2020 compared to 2019. Note, during a full/partial government shutdown, only the period of the shutdown is considered a qualified period. For 2021, the required drop in revenue compared to 2019 lowers to 20% or higher, making it much easier for businesses to qualify going forward.

Once a business has established it has an eligible period/quarter, it must now determine how many Full Time Employees (FTEs) the business averaged during 2019, so the business may determine if it paid any qualified wages during the eligible period/quarter. An FTE, for the purposes of the ERC, is any employee that, in any calendar month in 2019, worked at least 30 hours per week, or 130 hours in a month. If the business averaged over 100 FTEs, then only the wages paid to employees who are not providing services are considered qualified (ex: A restaurant with over 100 FTE’s is partially shut down by government mandate. Only the wages paid to employee’s who are not coming into work are considered qualified wages). If the business averaged under 100 FTE’s, then the any wages paid to employees during an eligible period/quarter are qualified, whether the employees are providing services or not (ex: same as above, but the restaurant has under 100 FTE’s. All wages paid, whether the employees are working or not, are considered qualified). For 2021, the 100 FTE threshold is increased to 500, allowing far more wages to be considered qualified.

The credit itself is calculated at 50% of qualified wages paid during an eligible period/quarter up to $10,000 per employee. This means, for 2020, any employees who were paid up to $10,000 of qualified wages during a qualified period/quarter earns the employer a max of $5,000 per employee for the year. In 2021, the credit is calculated at 70% of qualified wages, up to $10,000 per quarter for the first two calendar quarters of 2021. So, for 2021, any employees who were paid up to $10,000 of qualified wages during a qualified period/quarter earns the employer a maximum credit of $7,000 per employee, per quarter, for a maximum potential credit in 2021 of up to $14,000 per employee for the year. Of course, any employee paid less than $10,000 will still earn the 50% and 70% for 2020 and 2021, respectively.

The calculation of this credit is complicated, and the scenarios presented here have omitted certain other limitations and stipulations for the sake of brevity. If you have any further questions, please give us a call and we would be happy to provide additional guidance.

Aaron Lavarias, CPA, Tax Manager