One thing that I hear quite a bit is what do tax accountants do in the summer. You would be surprised how busy our summers are. There are always projects for clients that need to be done. This summer, we are doing a lot of work with the Employee Retention Credit.
I remember us talking about this, but it has been a little while, so can you refresh our memories on what the Employee Retention Credit is?
- It is a tax credit intended on keeping people employed through the pandemic. Unlike a deduction, this is a dollar for dollar credit that can offset a business’s payroll expense
When did the credit start?
- It actually started in March 2020 when the pandemic started and has been extended to December 31, 2021.
What’s the Maximum amount of the credit?
- For 2020, the credit is based on 50% of qualifying wages up to $10,000. So the max credit is $5k per EE per year.
- In 2021, the credit was expanded and is now based on 70% of qualifying wages up to $10,000. So the max credit is $7k per EE per quarter. If a business qualifies for the first and second quarter – the max credit is $14,000 – $28,000 per employee if a business qualifies for the whole year!
How does an employer qualify?
- They have to meet one of two tests-
- Their operations were fully or partially suspended due to government orders OR
- In 2020, they had a 50% reduction in gross receipts compared to the same quarter in 2019 OR
- In 2021 you are eligible if the business only had a 20% reduction in gross receipts compared to the same quarter in 2019.
Is this a quarter by quarter calculation?
- Yes.
- So you can qualify for one quarter and not the next.
How does PPP factor into the calculation?
- A business cannot use the same payroll expense for both the employee retention credit and PPP.
- That is what can make this calculation so complex.
- We are spending our summer doing the math to maximize the credit.
Anything else we should know before we go?
- As business’s get to the end of their PPP second draw 24 week period, we are cautioning them not to do the PPP loan forgiveness application too quickly.
- One thing we learned from the first round of PPP is that even though you can justify forgiveness with payroll alone, you may not want to do it.
- By taking other expense for PPP forgiveness might allow more wages available for the ERC.
Be sure to talk to a tax professional if you have any questions about the Employee Retention Credit or would like further assistance.
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.
