Most Overlooked Opportunity for Small Business Owners – The Employee Retention Credit
A Hidden Gem in the Stimulus Package That Could Earn You Back Thousands
The recently passed stimulus bill retroactively allows PPP borrowers access to tax benefits, such as the Employee Retention Credit. Navigating the interaction between PPP and other programs is complex; effective business and tax planning will be crucial.
Webinar hosted by The Greater Bethesda Chamber of Commerce
While PPP2 has received the most attention of any provision in the recently-passed stimulus bill (the Consolidated Appropriations Act, 2021 or “CAA”) the package also frees up significant amounts of money in tax benefits and expands eligibility for many programs. Reimbursements (in the form of tax credits) are newly available for qualified employee wages for many companies. We encourage clients to contact us now to review eligibility for these programs. The new stimulus bill also significantly changed tax treatment of PPP forgiveness and the program’s interaction with other relief programs. Many PPP borrowers are now eligible for significant tax relief under the CAA and should plan accordingly.
Eligibility for the Employee Retention Credit (ERC) Has Been Expanded
The ERC is a tax credit that qualified businesses can claim on qualifying employee wages. It reimburses eligible employers for a portion (50% or 70%) of qualified wages, which are capped. Eligibility has recently been expanded – we encourage clients to contact us now to review eligibility for this credit. The CAA extended the ERC through the second quarter of 2021, increased its value, and expanded eligibility. The credit works differently in 2020 and 2021, though some of the recent changes are retroactive to March 12, 2020
How Does the Employee Retention Credit Work for Wages Paid in 2020?
For wages paid after March 12, 2020, and before January 1, 2021, the ERC offers eligible employers a credit for up to 50% of qualified wages and employer group health plan expenses (capped at $10,000 of wages per employee for all of 2020). That means the credit has a maximum value of $5,000 per employee for all of 2020. According to the IRS, a company is eligible if it:
- experienced “the full or partial suspension of the operation of their trade or business … because of governmental orders limiting commerce, travel, or group meetings due to COVID-19,” or
- had a “significant decline in gross receipts”
For the purposes of the ERC the “significant decline” begins in the first calendar quarter of 2020 for which the company’s gross receipts are less than 50% of those for the same quarter of 2019. The significant decline ends immediately after the first subsequent calendar quarter for which gross receipts recover to more than 80% of their level in the same quarter of 2019.
For businesses that averaged 100 or fewer full-time employees in 2019, the credit applies to any employee wages and group health plan costs (up to $10,000 per employee) paid during the period that operations were suspended or the period of “significant decline” defined above.
Businesses that averaged more than 100 full-time employees face additional restrictions. They can only claim the credit on wages (including qualifying healthcare costs) paid to employees that are not providing services because operations were suspended or because of the decline in gross receipts. Qualified wages (in addition to the $10,000 cap) are limited to the amount that the employee would have been paid during the 30 days before the period of economic hardship.