Employee Retention Credit
CPAs are more critical now than ever.
A modern CPA does more than balance the books and file tax returns. A (good) modern CPA acts as a trustworthy financial advisor to their clients. They analyze and give advice, helping their clients optimize business structures to minimize tax liability.
That’s why over the past year, CPAs have made some of their most important contributions ever.
It’s the CPA’s job to understand changing tax codes and advise clients on what to do to ensure they’re taking full advantage of all available credits and deductions. That level of involvement lets you become a true partner to your clients.
The Employee Retention Credit (ERC) was one lever to come out of the COVID-19 crisis and the associated stimulus measures. The credit is intended to encourage businesses experiencing shutdowns or loss of sales to keep employees on the payroll despite reduced receipts.
The Employee Retention Credit – What is it?
With the ERC, eligible employers can claim a refundable tax credit against the employer share of Social Security tax, equal to 70% of the qualified wages paid to employees between January 1 – December 31, 2021; 50% of qualified wages per employee for Q4 of 2020.
The ERC originally applied only to October 2020 – June 30, 2021, but was amended in the Consolidated Appropriations Act (CAA) to extend through December 31, 2021.
Qualified wages are limited to $10,000 per employee, per calendar quarter in 2021, and Q4 of 2020. The 70% rule (for 2021) and the 50% rule (for 2020) mean the maximum ERC amount available is $33,000 per employee.
Who is Eligible?
The ERC applies to any private-sector business or tax-exempt organization that carries on a trade or business that was either:
- Fully or partially suspended due to orders from the federal or state government limiting commerce, travel, or group meetings due to COVID-19,
- Or, experienced a significant decline in gross receipts during any quarter compared to that in 2019. It was defined as a 50% decline in any quarter during 2020 and a 20% decline in 2021.
Note: employers not yet existing in 2019 can use 2020 as a baseline to measure the decline.
A suspension of operation is when the government says you must close your business or limit your operations.
The most commonly impacted clients are restaurant clients, bar, clients, gym, hotel, theater, concert venue, hospitality. In other words, those affected most by the shutdown measures put in place intended to slow the spread of COVID.
What Wages Qualify?
The rules regarding which wages qualify vary depending on the employer’s size. We address these rules and more in the free webinars and other resources found on this page of our website.
Qualifying wages for large employers (average of more than 500 FTEs in 2019) in 2021 are salaries paid to employees not working or providing services due to suspended operations or a decline in sales.
Not providing services can be interpreted as not working at all or for wages paid for above actual working time. It could also consider wages paid at a lower pay rate than average, or even for furloughed employees paid salaries or health insurance.
However, the rule is slightly different for small employers (averaging less than 500 FTEs in 2019). For small employers, wages for all employees during suspended or reduced operations qualify, regardless of whether or not the employees provided services.
It’s important to note that the split between large and small employers was changed for 2021. In 2020, the threshold was 100+ FTEs to qualify as a large employer.
What type of employee compensation counts?
- Salary and wages
- Tips (if included on W2)
What type of compensation doesn’t count?
- Self-employment income
- Severance packages
- Wages paid to a relative of a 51%+ owner cannot be used
The legislation does not explicitly exclude wages paid to owners and their spouses.
Employers who received PPP 1 or PPP 2 loans can now claim the ERC for qualified wages that were not treated as payroll costs when obtaining forgiveness of the PPP loan. Tri-Merit helps CPAs and small businesses maximize the salaries they can use between PPP, ERC, and other credit and incentives if applicable. Here is an example of the additional savings one CPA firm generated for their client by working with Tri-Merit:
The exclusions tightened a bit for 2021. In general, your clients can’t count the same wages for multiple credits.
That means wages used for the ERC can’t also be applied for the following credits:
- R&D Credit (not valid in 2020, but applies for 2021)
- Indian employment credit
- Military differential wage payment credit
- Family and medical leave credit (Code Sec 45S)
- Sick or family leave credits (Code Sec 3131 & 3132)
Work with Tri-Merit
CPAs often know certain tax code sections exist, but everyone can’t be an expert at everything. That’s why it’s crucial to leverage the services and experiences of experts, especially for complex topics like the Employee Retention Credit.
The ERC isn’t a yes or no, cut and dried credit. Many factors and restrictions affect which wages of which businesses in which periods qualify. Maximizing the benefits to your clients requires a solid understanding of the details behind the legislation.
BE MORE CONFIDENT IN WHO YOU TRUST TO ADVISE YOUR CLIENTS.
We understand what it’s like for CPAs to question whether they have selected the right specialty tax partner. The right partner will have proven expertise and services to enhance the relationship between client and CPA. This is why Tri-Merit serves as an extension of the CPA’s advisory team to reinforce the CPA’s role as a trusted advisor while helping taxpayers increase cash flow through specialty tax incentives.
Schedule a discovery call at 800.624.1076 to give your clients the best possible experience with a partner you can trust.
R&D tax credit | Cost segregation | 179D | 45L | Employee Retention Credit