Many employers did not take advantage of the Employee Retention Credit (ERC) in 2020 because the ERC’s original rules denied the credit to employers who received funding under the Paycheck Protection Program (PPP). The Consolidated Appropriations Act (CAA), enacted in December, extends the ERC through June 2021 and, more importantly, allows employers to benefit from both the PPP and the ERC. The following provides an overview of the ERC changes and some planning considerations for eligible employers.
The ERC helps offset wages paid by businesses that suspended operations due to a government order or experienced significant revenue reductions in 2020. An eligible employer calculates the ERC quarterly and claims the credit on its quarterly payroll tax return, Form 941. The change allowing PPP recipients to claim the ERC is retroactive to 2020, so employers who did not qualify for the original credit may now be eligible to claim it. However, an employer that receives PPP funds may not use the same wages for the ERC that it uses for PPP forgiveness.
An employer that is eligible to retroactively claim the ERC for 2020 can claim the credit on an amended quarterly payroll tax return, Form 941-X, for the applicable quarter. The CAA also enhanced the ERC to provide more benefit and make more employers eligible in 2021. While the change allowing PPP recipients to claim the ERC applies to both 2020 and 2021, eligibility standards and how the credit is calculated differ significantly between the years (see chart).
|Eligible Wages (per employee)||$10,000 per year||$10,000 per quarter|
|Required Revenue Decrease*||50%||20%|
|Maximum Number of Full-Tim Equivalent Employees**||100||500|
* Compared to the same quarter of 2019
** Employers with more employees may only receive credit for wages paid to employees who are not working
The IRS is expected to issue guidance on how to apply for the 2020 credit. Particularly, the IRS should address the interaction between the ERC and PPP loan forgiveness.
To maximize the ERC, PPP borrowers who have not yet applied for loan forgiveness may find it beneficial to minimize the amount of payroll costs and maximize the other eligible costs that they use in their forgiveness applications. Also, if an employer is eligible for a second round of PPP funding, the covered period for loan forgiveness begins when the employer receives the loan. Consequently, an employer may be able to increase its ERC for the first quarter of 2021 by waiting until closer to the March 31 deadline to apply for its second PPP draw. An eligible employer can either receive a refund of the ERC or can reduce its federal payroll deposits to take the ERC into account.
The IRS has been noticeably slow in processing refunds. If you believe you will qualify for the credit, reducing your deposits may be a better option. The amount of the ERC reduces the amount of the employer’s tax-deductible compensation. Employers that will apply for the 2020 ERC should wait to file their 2020 income tax returns until their ERC amounts are determined, which may necessitate filing for an extension.
The enhanced ERC will benefit many employers in 2021 that are still struggling from the effects of the COVID-19 pandemic. For businesses that will be able to retroactively claim the ERC in 2020, we advise patience. An employer has three years to file Form 941-X to claim the ERC, and waiting for the IRS to publish guidance will make the process go more smoothly. If you have questions about the ERC, the PPP, or any similar programs please contact us.
PKS & Company, P. A. is a full service accounting firm with offices in Salisbury, Ocean City and Lewes that provides traditional accounting services as well as specialized services in the areas of retirement plan audits and administration, medical practice consulting, estate and trust services, fraud and forensic services and payroll services and offers financial planning and investments through PKS Investment Advisors, LLC.
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