Below is an article published by the Wakefield, MA accounting firm Johnson O’Connor Feron and Carucci LLP (www.Johnsonoconnor.com) that describes both the original 2020 and the 2021 updated version of this potential tax credit. Johnson O’Connor is a leader among New England accounting firms and is recognized for their high level of accounting experience, trusted long-term client relationships, deep industry expertise, and proactive business guidance.
HMA consultants will be reviewing our client's data, especially at the end of the first quarter of 2021, to help determine if they are eligible for this generous credit. If eligible, we will work with their practice accountant and payroll company to apply for the credit.
Johnson O’Connor Alert
Employee Retention Credit
The passage of the Consolidated Appropriations Act in December 2020, amended the provisions of the employee retention credit (ERC) allowing businesses who previously took out a Paycheck Protection Program loan to also claim the ERC. Earlier this month, the IRS issued a notice on how to retroactively claim this credit for 2020.
To be eligible for the 2020 ERC, an employer must have been partially or fully shut down by a government order or have had a reduction in gross receipts of 50% or more in one quarter in 2020 compared to that same quarter in 2019. If partially or fully shut down, the credit can only be claimed during the shut-down period, therefore it is more advantageous to be able to claim the credit showing a reduction in gross receipts as the credit can then be taken over the entire quarter.
Additionally, an employer has to evaluate how many full time employees they had during 2019. For ERC purposes, a full time employee (FTE) is considered someone who works 30 hours per week or 130 hours per month. If an employer had over 100 full time employees during 2019, the credit can only be claimed for wages paid to an employee while they are not providing any services (i.e. getting paid for not working). For example, a restaurant continued to pay its wait staff normal wages even though they were closed. If under 100 full time employees during 2019, the credit can be claimed on any wages paid to any employee.
The 2020 credit is equal to 50% of eligible wages up to $10,000, or a maximum amount of $5,000 / employee. This amount is for the full year, but can be claimed over multiple quarters. For example, an employer may claim a $5,000 credit for one employee during one quarter, and then claim $2,500 in one quarter and $2,500 in a subsequent quarter for another employee.
The rules change slightly for the 2021 ERC. The shutdown order is still in effect, but the gross receipts test changes from a reduction of 50% to only a reduction of 20%. The comparison is still done using 2019 quarters, so a comparison of quarter 1 2021 to quarter 1 of 2019, for example. The full time employee count was also changed from 100 full time employees to 500 full time employees. Additionally, the credit amount was changed from 50% of eligible wages up to $10,000 to 70% of eligible wages up to $10,000, or a maximum amount of $7,000 / employee. While the maximum $5,000 / employee for 2020 was applicable to the entire year, the $7,000 for 2021 is applicable to each quarter. The American Rescue Plan Act passed earlier this month also extended the 2021 ERC for the entire year, therefore this could potentially mean collecting up to $28,000 / employee.
If the business received PPP funds and is looking to the claim the ERC, a business must ensure that the same wages used for the ERC cannot be used for the PPP for vice versa.
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