The employee retention credit (ERC) is still around; although, it’s been upgraded with the passage of the second relief bill at the end of 2020. Each option for the refundable payroll tax credit has its own rules and regulations for the first and second rounds of funding. Some of the ERC requirements have been changed, retroactively, as well as prospectively, providing more options for businesses to claim it.
Updates to Eligibility
For a business to be eligible for the employee retention credit, it must meet one of the following:
- The business was fully or partially suspended due to federal or state orders limiting commerce, travel, or group meetings due to COVID-19.
- The business had a 50% year-over-year decline in gross receipts during any quarter of 2020 or a 20% decline in the first two quarters of 2021 compared to the same period in 2019.
Note that some governmental employers, like state colleges, universities, and hospitals are now eligible for the credit; certain businesses that were created in response to the pandemic may also be eligible.
Once you’ve determined whether your business is eligible, the next step is to determine the size your business would be classified as: small or large. For 2020, businesses with 100 or fewer employees were classified as small; however, this has changed under the act. For 2021, businesses with up to 500 employees are considered small businesses.
The dollar limits have also changed with the act:
- Eligible small businesses: Wages paid in 2020 are eligible for a 50% credit; in 2021, that amount changes to 70%.
- Eligible large businesses: Only wages that were paid to furloughed employees or those who weren’t working qualify for the credit. Otherwise, the dollar limits are the same as those for eligible small businesses.
- Wages paid to some employees who work at a level below their normal qualifications may also qualify.
The maximum credit is $5,000 for the 2020 tax year and $7,000 per quarter for each of the first two quarters of 2021.
Additional Changes to the ERC
- A business is eligible to take the ERC, even if it has taken a PPP loan. This change is retroactive for wages paid after March 12, 2020. However, businesses may not take a double deduction; meaning that the same wages used for the PPP loan forgiveness cannot be used for the ERC.
- Businesses may use the immediately preceding quarter when determining their eligibility.
- The ERC has been extended through June 30, 2021.
This is just an overview of some of the complex provisions of the new ERC rules. To ensure your business takes advantage of any tax credits it may be eligible for, reach out to our tax specialists. They would be happy to provide specific guidance for your business.