What are the Qualifications for the 2021 Employee Retention Credit?

Many business owners have trudged through a long, dark tunnel during the COVID-19 pandemic. No matter what coping strategies you used to keep your business afloat, you’re surely exhausted.

Heads up! Because of everything else you’re juggling, you might not be aware of the 2020 and 2021 Employee Retention Credit (ERC) available for your payroll taxes. The credit, created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, rewards employers who’ve valiantly kept their staff employed even though their business’s income tanked.

Businesses that suffered financially starting on March 12, 2020—but kept handing out paychecks after that—are due for a reward. This credit is designed to reduce your payroll tax liabilities to make it easier to keep your staff working.

So how do I make sure I don’t miss out?

We know you aren’t in business because you love doing taxes (apologies to any tax preparers out there). Understanding the newest rules for your quarterly IRS Form 941 is going to mean spending one-on-one time with a calculator and some spreadsheets. But the benefit of investigating this credit is clear—you’ll have more money to spend on the business you care so much about.

We’ve boiled down the basics to see if this credit will work for you. If you think it does, we recommend that you consult a CPA to ensure you navigate the rules properly so there are no hiccups down the road.

Find out if your business qualifies

Businesses of any size can take the credit and recipients don’t need to worry about applying for forgiveness. This isn’t a loan—it’s a credit on payroll taxes you owe.

You qualify if:

A governmental authority ordered your business to shut down or reduce its hours.

Your business fully or partially shut down during any quarter of 2020 or 2021 (starting March 12, 2020).
The credit applies only to the portion of the quarter(s) you were affected by the shutdown.

Your business experienced a significant reduction in gross receipts.

For any quarter of 2020, your gross receipts were 50% or less than the same quarter in 2019

For any quarter of 2021, your gross receipts were 80% or less than the same quarter in 2020 OR 2019

You can pick what quarters you want to compare. Remember—you’re comparing first quarter to first quarter, second quarter to second quarter, and so on, as time went on during the pandemic.

The details

Bird’s Eye View: If your business qualifies, up to $10,000 of the wages and health-plan expenses you paid to each employee is multiplied by 70% (for the quarters you were affected during tax year 2021). That amount offsets what you owe for the employer portion of the Social Security (FICA) tax. If that amount is higher than what you owe, whatever is leftover is a refundable tax credit. You can still get this tax credit for tax year 2020, but only 50% of the wages and health-plan expenses you paid each employee per affected quarter is deductible, up to a limit of $10,000 for the entire year.

Good resources for more information are this Journal of Accountancy article and the official IRS rules.

Even more good news

The credit has been extended to hospitals, medical care providers, colleges, and universities. And, in certain circumstances, you may request that the IRS pays you the credit in advance.

There’s always a catch, right? Special rules apply if:

Your business was granted a Paycheck Protection Program (PPP) loan. Don’t let this discourage you from looking into the ERC, though. The benefit might be limited, but it will still help.

You own 50% or more of your business and you employ family members. Only your spouse can receive the credit, not other relatives.

You’re self-employed, an independent contractor, or sole proprietor. You can take the credit if you have employees, but not if you are your only employee.

Keep up with rule changes

A significant hurdle to using this credit is that the IRS rules have changed and changed . . . and changed. That’s the best reason to consult a CPA. At our BGFN in Temple, Texas, we follow tax law changes daily—so you don’t have to.

Imagine the good you can do with these tax savings!

You deserve it—keeping employees on the payroll was the right thing to do. You worked hard to make it happen.

DON’T WAIT TO TAKE ADVANTAGE OF THIS CREDIT. Businesses file Form 941 (payroll tax forms) every quarter—so this could help you right away.

Ready to find out more?

Let BGFN help you make the most of this tremendous tax credit. Set an appointment today to find out about the ERC and even more ways to save on your taxes.