With the tax filing deadline approaching, make sure your company is getting all the assistance available from government programs. For instance, that means checking that you've fully utilized the Employee Retention Credit (ERC), the refundable tax credit designed to make it easier for businesses to keep employees on the payroll.
The credit is getting extended as part of the American Rescue Plan Act, the $1.9 trillion relief package just signed by President Biden. Originally scheduled to end on June 30, ERC will continue through year end, giving business owners access to as much as $33,000 per employee in incentives.
How the credit works, depending on the time frame
First half of 2021:
Eligible employers can claim a refundable credit against the employer share of Social Security tax equal to 70 percent of a full-time employee's qualified wages paid--including certain health plan expenses--from January 1 through June 30, 2021. The maximum ERC amount available is $7,000 per employee per quarter or $14,000 for eligible wages paid in the first half of 2021.
That component is available to companies that experienced a full or partial suspension of operations as a result of government mandates, or those that can show at least a 20 percent reduction in quarterly gross receipts in 2021, compared with the same quarter in 2019.
Second-half of 2021:
The new law allows businesses to claim the refundable credit against the employer share of employment taxes (including Medicare), equal to as much as $7,000 per full-time employee per quarter during the last half of the year. So, including the existing provisions, business owners this year would qualify for up to $28,000 per employee.
The same eligibility rules apply in the last two quarters of 2021: Your company must have experienced a full or partial shut down or at least a 20 percent drop in quarterly gross receipts in 2021.
Full year, 2020:
Employers can also qualify for a look-back to 2020 to access an additional credit per full-time employee. The measure was authorized under the Consolidated Appropriations Act (CAA), which also allowed ERC recipients to apply for a Paycheck Protection Program loan, although employers can't claim the ERC on expenses paid with forgiven PPP funds.
To access the 2020 credit, which spans March 12, 2020 through January 1, 2021, eligible companies must show a more than 50 percent decline in quarterly gross receipts, compared with the same quarter in 2019. The credit is 50 percent of qualified wages paid, up to $10,000 per employee in 2020. The maximum credit available is $5,000 per employee.
How to file for the benefit
PPP recipients can file amended tax returns to claim the ERC for 2020 and/or claim an ERC in their 2021 tax filing. Also, unlike the PPP, which is designed for small businesses, a company's head count doesn't affect eligibility for the credit.
One caveat: The size of a business dictates which wages can be claimed. Large businesses (more than 500 employees) can only claim the ERC for wages paid to employees for the time they are not providing services. Smaller businesses (500 or fewer employees) can claim a credit for all wages paid to employees whether they're actively working or not, according to accounting firm BDO.
The CAA increased the threshold for "large employer" to more than 500 employees, up from more than 100. Note that the 100-employee standard still holds when applying for the 2020 credit.
Companies with fewer than 500 employees may also request advance payment of the credit (subject to certain limits), directly from the Internal Revenue Service.
"It's a potential big windfall for companies in the U.S.," said John Bly, regional managing partner at Aprio, an Atlanta CPA and advisory firm, during a recent webinar hosted by business leverage adviser MultiFunding. "And people are not talking about it enough."
That said, he added, ERC also presents headaches for some business owners--particularly now as they're filing their year-end taxes. Businesses that are eligible for the ERC may also have taken advantage of the PPP and may have already applied for loan forgiveness. Understanding the nuances of these interrelated programs and their reporting requirements is critical and requires time and resources that a business's existing accounting function may not have, he adds.
To claim the credit, eligible employers need to report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns (Form 941), according to the IRS. For those filing annually, companies must fill out form 941 for every quarter in which they're applying for the ERC. To get the ERC advance, they should fill out Form 7200.