As we continue to navigate our way through a global pandemic, we would like to remind employers that have not already taken advantage of the Employee Retention Credit (ERC), that there is still time to do so.
Established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the ERC is a wage-based credit aimed to help employers keep employees on their payroll during the pandemic. The credit was initially made available in 2020 and was extended through the third quarter of 2021 by the Consolidated Appropriations Act. The ERC can provide substantial savings to eligible employers.
Eligibility to claim the ERC can be achieved through two different qualifying methods. The first method allows an employer to claim the credit if it experienced fully or partially suspended operations during any calendar quarter in 2020, due to orders from an appropriate governmental authority.
The second qualifying method requires a tax basis gross receipts test. For the tax year 2020, employers with 100 or fewer employees are eligible for the ERC in any quarter in which gross receipts were less than 50 percent of those in the same quarter in 2019. For the tax year 2021, employers with 500 or fewer employees are eligible for the ERC in any quarter in which gross receipts are less than 80 percent of those in the same quarter in 2019.
For 2020, the ERC is equal to 50 percent of each employee’s qualified wages paid during the eligible period. The qualified wages used in the calculation are limited to a maximum of $10,000 per employee per year, resulting in a maximum ERC of $5,000. For 2021, the same rules apply. However, the rate was increased to 70 percent, and the $10,000 annual wage limit was expanded to $10,000 per quarter through the third quarter of the year, resulting in a maximum ERC per employee of up to $21,000.
Credits can be claimed through filing amended payroll tax forms and can result in either a refund of previously paid employer payroll taxes or be used to offset future payroll tax owed.
Employers that received Paycheck Protection Program (PPP) loans are still eligible to claim the ERC; however, wages utilized to claim PPP loan forgiveness cannot also be used to claim the ERC.
If you believe you may qualify for the ERC, are unsure, or would like assistance with determining eligibility or assistance with calculating the amount of the credit, our firm can help. Visit dmcpas.com to learn more.