The Employee Retention Credit is not new. Until December 27, 2020, any business with a PPP loan was ineligible for the refundable payroll tax credits under the ERC.

Two federal stimulus bills later, the ERC may now be the hottest ticket in town. Federal legislation not only allows for interplay with forgivable PPP loans, but has made the lucrative credits easier to qualify for in 2021 quarters and extended the window to claim them through December 31, 2021.

What’s most important to acknowledge is that the ERC for 2020 and 2021 are different. This is illustrated in our comparison chart posted in our detailed reference guide section on the Covid-19 Resources tab. Additionally, the IRS landing page for the Employee Retention Credit provides a summary on the 2020 credits (which notably has yet to be updated with authoritative guidance regarding the 2021 credits). Rather than regurgitate guidance, we want to highlight the important aspects of the ERC in both years.

One more thing – these credits can be retroactively claimed over three years by amending payroll tax filings, so we believe it’s more important to “get this right” in most situations rather than rush the process given the lack of guidance currently available.

 

2020 ERC Credits

  • Not nearly as lucrative as credits in 2021 quarters
MKS: As noted in our comparison chart, credits are limited to 50% of qualifying wages up to $10,000 per employee for the entire YEAR. If you are eligible in Q2, Q3 and Q4 of 2020, you’re only receiving $5,000 maximum for each employee.

 

  • More difficult to be eligible in 2020 vs. 2021
MKS: Quarterly gross receipts have to be down 50% in a 2020 calendar quarter compared to that same quarter in 2019, whereas in 2021, this bright line receipts test changes to a 20% decline. The other eligibility option is a full or partial government shutdown of your operations in a nominal way (at least 10% of your business). We won’t dive too deep, but this hurdle is more difficult to meet than you may think.

 

  • Wages paid with PPP funds during a covered loan period in 2020 are not eligible for the ERC
MKS: Lots of businesses received PPP loans and elected a 24-week covered period in 2020. With most covered periods running from April to October, it’s likely that payroll costs in Q2 and Q3 of 2020 were allocated to this program and are unusable for ERC purposes.

 

We advise the following steps for looking into 2020 ERC credits:

  1. Determine the quarters in 2020 you were eligible, if any
  2. Remove any wages paid that were used on a PPP forgiveness application
  3. Remove any wages paid to individuals who own more than 50% of the entity, and those related to said individual (this includes spouse, children, immediate family and in-laws)
  4. Quantify any remaining wages paid to employees in eligible quarters

 

2021 ERC Credits

  • Every calendar quarter in 2021 is now in play
MKS: Recall that there are two ways to qualify for 2021 ERC credits – full or partial government shutdown order, or gross receipts decline of 20% or more in any calendar quarter in 2021 compared to 2019. Yes, the reference period will continue to be the corresponding quarter in 2019, not 2020 (note: we note a potential “election” to compare to the most recent calendar quarter, but are awaiting IRS guidance to be sure).

 

  • The 2021 credits are now 70% of qualified wages up to $10,000, and this resets each QUARTER
MKS: Instead of $5,000 per employee, the maximum credit per employee is $7,000, and this cap resets at the end of each quarter. If your business continues to suffer from the effects of the pandemic and you qualify for the ERC in each calendar quarter this year, any employee that makes roughly $40,000 annually could yield a refundable credit of $28,000 to your business. This is an extreme example, but helps illustrate the potential benefits.

 

  • PPP expires on March 31, 2021, and the covered period is now flexible between 8-24 weeks
MKS: 2020 PPP loans gave borrowers two choices for a covered period, 8 or 24 weeks. Under the new PPP guidelines, a borrowing entity could exhaust the PPP funds in as little as 8-12 weeks, freeing up qualified wages to claim the ERC. We strongly encourage any business owner in possession of a PPP loan to maximize eligible non-payroll costs with those funds (40% of the loan amount).

 

We advise the following steps for looking into 2021 ERC credits:

  1. Ask your payroll provider to set up a new code in the payroll system to tag potential wages outside of a PPP loan covered period – it will benefit PPP borrowers to be strategic about the allocation of funds in 2021
  2. Review eligibility each quarter before completing the quarterly payroll tax filing (Form 941)
  3. Remove any wages paid to individuals who own more than 50% of the entity, and those related to said individual (this includes spouse, children, immediate family and in-laws)

 

The ERC credits are exciting but have given our team pause as we await further guidance from the IRS (specifically related to the 2021 ERC). It’s important to be aware of these credits and review eligibility, but we believe it’s prudent to tread carefully when claiming credits right now. Our dedicated pandemic assistance team is frequently searching for new information and comfortable strategies, and we expect to assist many of our clients in reviewing these credits after the busy season.