LUTZ BUSINESS INSIGHTS
employee retention credit provides significant benefits for employers
JUSTIN KORTH, TAX MANAGER
- Did your business suffer a revenue decline in 2020?
- Do you expect a revenue decline in 2021 compared to 2019?
- Did your business experience a shutdown in 2020?
- Did your business continue paying employees during these times of disruption?
If so, there may be significant opportunities to claim refundable tax credits on wages paid in 2020 and 2021.
The Consolidated Appropriations Act (CAA), signed by President Trump in late-December 2020, extended and expanded the Employee Retention Credit (ERC), a refundable payroll tax credit.
The CAA repealed a provision under the CARES Act signed in March 2020 that made Paycheck Protection Program (PPP) borrowers disallowed from using the ERC. Now both programs can be used by eligible employers retroactively and prospectively, although double-dipping the same wages is not allowed. Many employers may now qualify for significant benefits in 2020 and/or 2021.
2020 ERC (wages paid 3/13/2020 – 12/31/2020)
To be eligible for the 2020 ERC, employers (including affiliated entities) must demonstrate one of the below:
- Full or partial suspension of operation due to a government order in 2020 (refer to IRS guidance), OR
- At least 50 percent decline in a 2020 calendar quarter’s gross receipts compared to the same quarter in 2019.
If the business meets one of the qualifying requirements, it must consider the average number of full-time employees in 2019. Employers (including affiliated entities) with fewer than 100 full-time employees are likely qualified.
The credit is 50 percent of up to $10,000 in wages (including health care expenses) per employee for calendar year 2020 (maximum $5,000 credit per employee). There may be limitations for owner and family members of owners.
The credits must be claimed on amended payroll tax returns (Form 941-X). Calculations can be complicated when considering interplay with Paycheck Protection Program (PPP) first draw, FFCRA credits (expanded paid sick leave/emergency FMLA leave), and the Restaurant Revitalization Program.
2021 ERC (wages paid 1/1/2021 – 12/31/2021)
To be eligible for the 2021 ERC, employers (including affiliated entities) must demonstrate one of the below:
- Full or partial suspension of operation due to a government order in 2021, OR
- At least 20 percent decline in a 2021 calendar quarter’s gross receipts compared to the same quarter in 2019.
- An election is available to use the immediately preceding calendar quarter for eligibility testing (e.g., 4th quarter 2020 gross receipts for Q1 2021 eligibility).
Should a business meet one of the requirements and have fewer than 500 average full-time employees (including affiliated entities) in 2019, it is likely eligible for the 2021 ERC.
The credit is 70 percent of up to $10,000 in wages (including health care expenses) per employee for each 2021 calendar quarter (maximum $28,000 credit per employee since program was extended through the end of 2021). There may be limitations for owners and family members of owners.
The credits must be claimed on payroll tax returns (Form 941). An advance refund can be claimed by filing Form 7200. This process and the calculations involved are complicated, especially when considering the interplay with Paycheck Protection Program (PPP) second draw, FFCRA credits, and the Restaurant Revitalization Program.
The American Rescue Plan Act of 2021 extended this program through December 31, 2021.
If you believe your business may qualify for the Employee Retention Credit, please contact your Lutz Representative or give us a call at 402.496.8800.
Updated on 4.20.2021
ABOUT THE AUTHOR
JUSTIN KORTH + TAX MANAGER
Justin Korth is a Tax Manager at Lutz with over four years of experience in taxation. He is responsible for individual, business, and fiduciary income tax returns, estate & business planning, and taxpayer representation on IRS matters. In addition, he provides consulting on small business accounting.
AREAS OF FOCUS
- Income, Business, and Fiduciary Income Tax Returns
- Taxpayer Representation
- Estate and Business Planning
- Client Accounting Services
- Small Business Accounting Consulting
- Forensic & Litigation Support
- Real Estate Industry
- Agriculture Industry
- Medical Staffing Industry
- Manufacturing Industry
AFFILIATIONS AND CREDENTIALS
- Nebraska Society of Certified Public Accountants, Member, Legislation Committee
- American Institute of Certified Public Accountants, Member
- Certified Public Accountant
- BSBA in Accounting and Finance, University of Nebraska, Omaha, NE
- UNO Young Alumni Academy, Member
- St. Vincent de Paul Knights of Columbus, Member
- Youth Catholic Professionals, Board President
- JPII Newman Center, Development Committee Member
- UNO College of Business Scholars Academy, Mentor
- Sacred Heart Catholic School, Mentor
SIGN UP FOR OUR NEWSLETTERS!
We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.