You may not have heard as much about the Employee Retention Credit (ERC), but do not miss out on ERC tax savings in 2021.
Take advantage of the credit while it remains available. Here’s what you need to claim your credit.
For a step-by-step checklist toward ERC tax savings, scroll down.
What is the Employee Retention Credit?
The ERC (also known as an Employee Retention Tax Credit or ERTC) is a federal tax credit created by the CARES Act in March 2020 to help employers impacted by COVID-19 with the costs of keeping workers. Under the American Rescue Plan, the ERC (a refundable tax credit) was updated and extended.
How much is the credit worth, and how it benefits your bottom line?
Under ERC, eligible employers receive a credit of $5k per employee per quarter in 2020 and $7k per employee per quarter in 2021.
A benefit to the ERC is it’s refundable, which means the credit is refunded no matter your tax liability. If your tax liability is lower than the amount of your ERC, you receive the difference.
Another benefit to the ERC is companies can take advantage of both the ERC and PPP. We touch on that below.
Finally, many believe that the ERC is only for businesses with 100 or fewer employees. Not true! Qualified wages could include employer contributions and wages paid to workers on furlough or leave due to COVID-19.
What’s new in 2021 for the ERC?
The following ERC chart summarizes how lawmakers’ changes to the ERC impact your credit.
Eligible, Not Eligible for ERC
Download our flowchart to know if you qualify for claiming the Employee Retention Credit.
If you’re eligible and want guidance on calculating your ERC and filing, let’s talk numbers.
How to determine your credit
Step 1: Determine the qualifying quarters in 2020-2021. Do the quarters qualify because of a reduction in gross receipts or a partial or complete suspension in operations?
Step 2: Was R&D credit claimed in 2020 or 2021? If yes, be sure to exclude R&D wages used in determining the credit. A chart of accounts for payroll with R&D wages is helpful here.
Step 3: Was a PPP Loan forgiven? PPP doesn’t disqualify your company from the ERC. Don’t include the same wages used for PPP forgiveness. Your PPP forgiveness paperwork and supporting documentation will provide the information needed.
Step 4: Certain wages paid to owners and related parties are excluded. Look to your company’s balance sheet for owner’s equity.
What form do you need to claim the ERC?
The credit is claimed on an amended Form 941-X for prior quarters or the reduced payroll tax and claim on Form 941 for the current quarter.