With all the changes 2020 has brought us, the IRS figured why not add another to the seemingly never-ending list. Here comes the Employee Retention Credit (“ERC”).
The ERC is a refundable payroll tax credit for qualified wages paid and health coverage provided by an employer whose operation was fully or partially suspended from the shut down from the COVID-19 pandemic for 2020 and 2021. It is also worth noting that wages paid with PPP loans are not eligible for the ERC.
There are a few tests that must be met to be eligible for the Employee Retention Credit. For 2020 there must be a gross receipts decline of 50% compared to the same quarter in 2019 and only a 20% decline of gross receipts in 2021 compared to the same quarter of 2019 or 2020 if the employer wasn’t in existence in 2019. The quarters that qualify are as follows:
2020 – 1st quarter (3/13-3/31), 2nd, 3rd, and 4th quarter are all eligible
2021 – 1st and 2nd quarter are eligible.
There are also employee limitations as well. You must have less than 500 average full-time employees (FTEs) in 2019.
The credit amount will depend on a few factors, in 2020 the amount will be 50% of qualified wages while having a limit of $10,000 per employee per year. While in 2021 the credit has been increased to 70% of qualified wages and having a limit of $10,000 per employee per quarter.
You can apply for the credit by filing your 4th quarter Form 941 reporting all qualifying quarters or amend your Form 941’s for each qualifying quarter in 2020. To apply in 2021 file form 941 for each qualifying quarter or fill out Form 7200 for advanced payment of employer credits.
Contact your Henry+Horne tax professional for more details.