Employee Retention Credits: 2021 Guide to Tax Credits

As part of the original legislation of the Coronavirus Aid, Relief, and. Economic Security Act, or CARES Act, two important means of COVID-19  business relief were introduced. 

The Paycheck Protection Program (PPP) was a forgivable loan available to employers with fewer than 500 employees.

The proceeds from PPP loans were intended to help employers retain employees and could be used for payroll, utilities, rent, mortgage payments, and mortgage interest.

These forgivable loans were first-come, first-serve, and many employers were unable to take advantage of this program due to the high demand for help in the pandemic.

Employee Retention Tax Credit Overview

The other form of relief, the Employee Retention Credit (ERC) also known as the Employee Retention Tax Credit (ERTC), applies to all businesses and nonprofit organizations.

In 2020, it was created as a refundable payroll tax credit for up to 50% of an employee's wages paid up to a $5,000 cap per employee. This credit could be claimed when operations were fully or partially suspended as a result of COVID-19. It could also be claimed if there was a 50% loss in gross receipts. That eligibility ended when the employer's recovery rose to 80% of its gross receipts in the prior year or December 31, 2021, whichever came first. 

For businesses with under 100 employees, wages and healthcare costs could be included. Businesses with more employees could only include wages for not providing services and healthcare costs. The tax credit could be taken against payroll taxes, or the excess credit could be refunded by filing Form 7200.

Need help? Apply for a free initial Employee Retention Credit Analysis to determine your eligibility and approximate credit. 

Understanding 2021 Employee Retention Credit vs. 2020

With further stimulus packages, the ERC continued to evolve. The Disaster Tax Relief Act of 2020, enacted December 27, 2020, extended and expanded the credit reporting period through the 2nd quarter of 2021.

The American Rescue Plan Act of 2021, or ARPA for short, enacted on March 11, 2021, extended the credit reporting period through the 4th quarter of 2021.

The Federal Infrastructure Bill, signed by President Biden and enacted on November 9th, 2021, effectively accelerating the end of ERC retroactively to October 1st, 2021. This cut-off date, however, does not pertain to wages paid by a recovery startup business, for whom the deadline remains the same. For most businesses, this means the credit reporting period for 2021 is only for the first three quarters of the year.

These legislative updates and changes allow businesses in need of relief to take advantage of the ERC for a reporting period throughout 2020 and 2021 with tax credit amounts that include: 

• 2020 Employee Retention Maximum Tax Credits
  • 50% of each retained employee's qualified wages for the year (up to $10,000) 
    =$5,000 per employee in 2020

• 2021 Employee Retention Maximum Tax Credits
  • 70% of each retained employee's qualified wages per quarter (up to $10,000) 
    =$7,000 per employee per quarter in 2021 ($21,000 per employee in 2021)

This is a maximum of $26,000 in tax credits per employee for 2020 and 2021 combined. 
*Note: This credit amount total is down from $33,000 after the reporting period was cut a quarter short by the Federal Infrastructure Bill mentioned above.

These credits may be received through payroll tax reductions or as a refund from prior quarters claimed on tax form 941.

It's important to also note that PPP recipients ARE eligible for ERC since the passage of ARPA, but most employers think otherwise since they were not initially eligible when the ERC was originally enacted. However, the two programs cannot cover the same expenses. This means payroll expenses previously covered by a PPP loan or loans are not eligible for ERC. 

Common Objections & Misconceptions Concerning ERC

With limited guidance, ERC can be difficult to understand. There are several common objections or ERC misconceptions that businesses may have when deciding if to file for the tax credits. 

These ERC misconceptions include, but are not limited to:

• Essential businesses do not qualify (UNTRUE)
• Business operations that were not suspended in 2020 or 2021 do not qualify (UNTRUE)
• If revenue has not declined by 20% or more, employers do not qualify (UNTRUE)
• Companies that received PPP loans do not qualify (UNTRUE)
• CPAs / accounting firms will automatically claim ERC for clients (UNTRUE)
• Credits for ERC are easy to calculate (UNTRUE)

Eligibility Requirements for ERC

As the intent of COVID business relief legislation is to reward employers for retaining employees, eligibility requirements are not as strict as some believe. 

A business is eligible if one of the following conditions is met: 

(a) it fully or partially suspends operations during any calendar quarter in 2020 due to government orders limiting commerce, travel, or group meetings due to COVID-19 

or 

(b) it experiences at least a 50% in 2020 or 20% in 2021 reduction in year-over-year gross receipts during the quarter.

Calculating and Claiming ERC Tax Credits

Once you understand if you qualify, calculating and claiming ERC tax credits require detailed payroll records to be kept, which should be a relatively simple task with some standard reports that were likely released since the legislation by the payroll software provider you use. 

Step One

If operations were not fully or partially suspended in the pandemic, first compare the business’ gross receipts, or earnings before deductions, between the quarter you are planning to claim ERC for, and the same quarter in the prior year. 

For 2020, these earnings should be less than 50% of those in the prior year. For 2021, these earnings should be less than 80% of those in the prior year.

Step Two

Next, calculate the credit per employee per quarter, and maintain a record of how you arrived at these calculations. 

An Excel worksheet may be helpful in this, as each employee must be accounted for in terms of total wages and staying within quarterly and overall caps for the credit per employee.

From there, total eligible wages for the quarter can be added together. The IRS has a worksheet within Form 941 instructions that can help determine the ERC amount once wage totals for the quarter have been calculated, on pages 26 and 28.

Note: For employers who are filing a claim for a retroactive ERC refund on prior qualified wages for the previous calendar quarters must fill out form 941-X, also known as the Adjusted Employer's Quarterly Federal Tax Return.

Step Three

Employers may opt to use Form 7200 to request advance tax credits to reduce employment tax deposits from payroll, as this can improve immediate cash flow. For companies that use outsourced payroll services, the payroll provider typically assists with the population of Form 7200 and withholding of these associated payroll tax deposits. This form is not, however, required to ultimately receive ERC. The credit can be claimed on the quarterly 941 or annual tax return, although the processing of these forms can typically take up to 16 weeks.

If a business encounters difficulties in calculating or claiming tax credits associated with ERC, consider consulting with a tax accountant, the local tax advocates, a local payroll company, or leverage the expert we've partnered with below. 

Need Help Calculating and Collecting ERC Tax Credits? 

Get started with an ERC expert today that can guide you through the whole process for attaining ERC tax credits from data gathering and determining eligibility to calculating credits to amending returns and, of course, getting paid. An initial analysis, to determine eligibility and an approximate tax credit, is completely free.  

Simply fill out the application below and an ERC expert will be in touch shortly with the next steps and access to your ERC management portal.