By: Jessica A. Distel, CPA, MBA - Director of Tax and Business Services
Your small business may be eligible for the Employee Retention Credit (ERC) in 2021 – and it is not too late to claim it. While the ERC was initially implemented by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it was the Consolidated Appropriations Act that extended the credit through June 30, 2021 and later the American Rescue Plan Act of 2021 that further extended the credit through December 31, 2021.
Employers who qualify can claim a credit of 70% of up to $10,000 of qualified wages paid per employee per quarter in 2021. This means an eligible employer could claim up to $7,000 per quarter per employee (or up to $28,000 for 2021 per employee). There are some limitations for startup businesses that started after February 15, 2020 and were forced to shut down due to a governmental order; in such a case, there may be a $50,000 per quarter limitation for the credit. The credit reduces the employer portion of the Social Security tax liability and any amount of the credit greater than the Social Security tax will be refunded by the IRS.
Eligible employers include those who:
1. Have been fully or partially suspended by a government order due to Covid-19
2. Have experienced a significant decline in gross receipts as a result of the coronavirus
For the 2021 ERC, a significant decline in gross receipts is defined as at least a 20% reduction in gross receipts in a 2021 quarter when compared to the same quarter in 2019. If a business does not have a significant enough reduction in gross receipts during the first quarter of 2021 as compared to 2019, it does have the option of determining eligibility based on gross receipts during the immediately-preceding calendar quarter; in this case the comparison would be the fourth quarter of 2020 compared to the fourth quarter of 2019.
The ERC is to be reported on the quarterly payroll Form 941. If the quarterly Form 941 was filed before you were able to calculate the credit, then an amended Form 941-X can be filed to report the credit and claim the refund.
While an employer can still be eligible for the ERC if it took out a Paycheck Protection Program (PPP) loan, you cannot claim PPP forgiveness and the ERC on the same wages. If you received a PPP First Draw or PPP Second Draw in 2021, it would be best not to apply for forgiveness until an analysis has been performed for your ERC eligibility. Not being able to claim PPP forgiveness and the ERC on the same wages creates a unique opportunity to strategically maximize the benefit from both programs. We strongly recommend you reach out to one of our team members in the Tax & Business Services Department at Buckingham Advisors. We can first help identify if your business qualifies for the ERC and can then create a strategic a plan to maximize potential benefits.