Designed to make it easier for businesses that keep their employees on the payroll despite challenges caused by the pandemic, the Employee Retention Credit (ERC) was created last March as part of the CARES Act. Recently, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended the credit, making a number of changes.
One change now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan, retroactive to the March 27, 2020.
The original credit, only available to businesses with fewer than 100 employees, was worth up to $5,000 per employee. Since Jan. 1, 2021, the max increased to $7,000 per qualifying employee per quarter, for a total of $14,000 in 2021, and it applies to businesses with less than 500 employees. Small businesses that hit the $5,000 cap during 2020 are still eligible for the increased cap in 2021.
For 2020, eligibility extended only to businesses experiencing a reduction in income of at least 50% compared to the same quarter in 2019. Now, the program only requires an income reduction of 20% compared to the same quarter in 2020.
How can your business take advantage of this?
Employers can access the ERC for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits, according to the IRS.
Read more information from the IRS or an article from Forbes dispelling myths about the ERC. Call our office with questions – our tax advisors can guide you and your business in determining how best to leverage the ERC.