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The Employee Retention Credit in 2021

The Employee Retention Credit (“ERC”) has had some upgrades and retrofits to some of the basic calculations with the most recent (12.27.20) CARES Act changes.

The biggest change is what makes the ERC most valuable, is that it removes the “either, or” language that previously limited employers to taking the PPP or the ERC, but not both. While the same wages cannot be forgiven (i.e. paid for with PPP funds) and used for the ERC, businesses can now be eligible for the ERC and the PPP, as long as the same payroll expenses are NOT used for both. 

Employee Retention Credit Eligibility Requirements

Let’s begin with 2020 ERC eligibility requirements since they are the base for both years, but 2021’s credit can be higher. First, an employer must have less than 500 employees and the wages to be considered run from May 12, 2020 through the end of 2020. Next, is the trickier part, the dreaded “gross receipts” test, which compares the 2019 sales/collections against the same time frame in 2020.

For purposes of this calculation, the comparison periods will be the last two calendar quarters for most employers; especially if the business received PPP funds in April or May of 2020. The qualifying time periods, July – September or October – December must be less than 50% of the gross receipts from the same time in 2019. Therefore, if Q3 of 2020 had $100,000 of gross receipts, then the same period, Q3 2019, must have been at least $200,000 in order for the employer to be eligible for the ERC. Once the gross receipts test is met, then the actual credit is calculated on a per employee basis. 

Qualifying Gross Receipts Examples

Quarter Gross Receipts for 2019 Gross Receipts for 2020 Change from ’19 to ’20 Is ’19 less than 50% of ’20? Is this Q eligible?
1 $ 100,000 $ 100,000 $ – 0% NO
2 $ 100,000 $ 45,000 $ (55,000) -45% YES
3 $ 200,000 $ 99,000 $ (101,000) -49% YES
4 $ 200,000 $ 150,000 $ (50,000) -25% YES

The calculation is then limited to a maximum of $5,000 per employee paid during the eligible quarter. For illustrative purposes, if the business paid 10 employees $5,000 in a single quarter, then the maximum credit available would be $25,000, which is 10 x $5,000 x 50%. The reality of this calculation is that most employees will not have the maximum gross wages during any calendar quarter, so the benefit of the credit will be less than the possible $5,000 per employee.

For any employer who meets the gross receipts test, it would be well worth their time to see how much of the credit was available, particularly if they expended their PPP funds in the 2nd and 3rd quarter of 2020. 

Employee Retention Credit Calculations

Employee Wages per Quarter Q2 Qualified Payroll Q3 Qualified Payroll Q4 Qualified Payroll
A – $15,000 $10,000 $0 $0
B – $7,000 $7,000 $3,000 $0
C – $3,000 $3,000 $3,000 $3,000
D – $12,000 $10,000 $0 $0
Total Wages $30,000 $6,000 $3,000
       
SUM of All Wages $39,000    
       
2020 Potential Credit Available: $19,500 = $39,000 x 50%  

Changes To The Employee Retention Credit in 2021

The changes for the ERC in 2021 are more lucrative and have a lower threshold for eligibility.

  • First, the employer can request an advance on the credit for Q1 or Q2 of 2021, which makes for a possible cash infusion when it is needed most.
  • Next, the maximum amount of the credit is $7,000 per employee.
  • And finally, the gross receipts test is lowered to be 80% or less, which is a large change from the 2020 rules.

The same calendar quarter of 2019 is still the base comparison period, but more businesses that survived 2020 are likely to be eligible, despite improved sales from 2020.

See the examples below for comparison.

Qualifying Gross Receipts Examples

Quarter Gross Receipts for 2019 Gross Receipts for 2021 Change from ’19 to ’21 Is ’19 less than 80% of ’21? Is this Q eligible?
1 $ 100,000 $ 75,000 $ (25,000) -25% YES
2 $ 100,000 $ 80,000 $ (20,000) -20% YES

 

2021 Employee Retention Credit Calculations

Employee Wages per Quarter Q1 Qualified Payroll Q2 Qualified Payroll  
A – $15,000 $10,000 $0  
B – $7,000 $7,000 $3,000  
C – $3,000 $3,000 $3,000  
D – $12,000 $10,000 $0  
Total Wages $30,000 $6,000  
       
SUM of All Wages $36,000    
       
2021 Potential Credit Available: $25,200 = $36,000 x 70%  

While this credit is out there and available for 2020 and 2021, the calculations required to determine eligibility can require some due diligence on the owner’s behalf. If you have questions about this credit or would like to see if your business would qualify for this credit, get in touch. 

What Tax Breaks Changed From 2018?

Congress extended some of the tax breaks retroactively to January 1, 2018. They now expire on December 31, 2020. Learn more about tax breaks that have been extended.

Tax Planning with GP CPA

GP CPA offers a wide range of business advisory services that are tailored to the needs of business owners. For those small businesses who need someone to keep the books, we can do that.

Your Business Payroll in 2020

Take control back from the big box payroll companies and work with someone who can guide you to a better payroll process. GP CPA + GUSTO is the modern way payroll runs and the partnership that moves your business forward.

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