The Employee Retention Credit — ERC tax credit — was not available to you in 2020 if you took Paycheck Protection Program money. It may be a different story in 2021.
You probably got a notice from your payroll processing company last year informing you about the Employee Retention Credit. However, somewhere in that notification, it most likely said that if you took a PPP loan, you were not eligible for the credit. So, you stopped reading and moved on to some other news.
But since late December, even those who took out a PPP loan may now be retroactively eligible.
Why is this important? This credit may be worth significant tax credits for your company. For 2020, it may be worth up to $5,000 per employee. For 2021, it may be worth up to $14,000 per employee.
There are eligibility requirements, qualified wage calculations and credit calculations, then filing for the credit on the appropriate quarterly payroll tax form.
How do I determine if I am eligible for an Employee Retention Credit?
Your business must have been a trade or business operation during 2020 and meet one of the following two conditions:
Your business has been fully or partially suspended during any calendar quarter due to governmental orders limiting commerce, travel or group meetings (i.e., COVID-19 shutdowns).
Your company has experienced a significant decline in gross receipts. This timeframe is calculated as any quarter after March 13, 2020, for which your gross receipts have been reduced by at least 50% from the corresponding 2019 quarter and ends when gross receipts for a quarter exceed 80% of the corresponding 2019 quarter.
How do I determine qualified wages and credit?
For purposes of the ERC, qualified wages are gross wages and health care costs paid by the employer that were not used for any other federal relief program (PPP, FFCRA). For 2020, qualified wages up to $10,000 per employee for the period of March 13, 2020, to December 31, 2020, may be used to calculate the credit. The credit rate is 50%.
For 2021, qualified wages up to $10,000 per employee for each quarter (first and second) may be used to calculate the credit. The credit rate is 70%.
Where do I claim the credit?
Credit may be claimed on the appropriate quarter’s federal payroll tax return Form 941. It is not claimed on your income tax return.
UMA member Tracy Fickett, CPA, operates BUSBooks, a specialty accounting firm dedicated to the motorcoach industry. If you have a question, you can reach her at firstname.lastname@example.org.