Employee Retention Tax Credit- FAQs by Syed Nishat

Employee Retention Tax Credit FAQs – by Syed Nishat

The COVID-19 pandemic has had long-term effects on our county, and small business owners have felt that in a particularly pinching way even now that some aspects of life have begun to normalize in the US. There were several tax breaks that were passed over the past year and a half to help, and one that businesses that have struggled the most are encouraged to take advantage of is the employee retention credit. This tax break can be significant, so what’s it all about?

What is the employee retention credit?

For eligible businesses, this 2020 tax break offers a refundable tax credit of 50% of up to $10,000 in wages per employee for 2020. The credit was further expanded in March of this year with the passing of the American Rescue Plan Act which made more businesses qualify and to greater benefit. Small businesses of fewer than 500 employees can also request an advance payment from the IRS, which can be a huge help for payroll. Because of the rule changes for 2021, businesses that may not have qualified in 2020 may qualify for this year.

Who is eligible?

The rules for 2020 and 2021 are slightly different. To qualify for the 2020 credit, businesses must have shutdown either partially or fully due to government orders due to the pandemic. This could mean travel, commerce, or meetings. Alternately, per IRS records, they must have had a more than 50% decline in gross income. The expansion for 2021 included businesses that again experienced a partial or full shutdown, but the IRS gross receipts qualification limit is now having had a 20% quarterly decline. Those that benefited from the Paycheck Protection Program can still apply for this credit, but it must be clarified which wages were covered by PPP and which will be covered with the employee retention credit.

How much is the credit for 2020?

The 2020 credit provided a 50% refundable tax credit of up to $10,000 in wages per employee. This means a maximum of $5000 per employee in qualified wages for 2020.

What changes to the credit were made for 2021?

With the passage of the American Rescue Plan Act, along with making more businesses able to qualify, the date of claim was also changed to extend through the end of 2021. Qualified businesses can deduct up to 70% of up to $10,000 in wages per employee per quarter. This is a significant increase, as it means that potentially an employer could get a credit of $28,000 per employee in 2021. The size of businesses able to claim the wages of all employees (rather than only those working during the quarter) also changed in 2021, adjusting from the 2020 limit of 100 employees to an average 500 employees for this year.

Can employers still apply for the 2020 credit?

Businesses may still claim the 2020 tax credit by amending their 2020 tax returns. To keep everything clear should anything be requested to prove eligibility in the future, it’s important for businesses to maintain good documentation, particularly in cases of government shutdown orders.

These programs were created for you to use as a small business owner working hard to take care of your employees and keep your business open. Because of the potential complexity of the various tax breaks and loan programs available as a result of the pandemic, it’s a good idea to work with a financial advisor who can advise you on what you’re eligible for, how to apply, and how to make sure you maintain proper documentation. This will ensure you’re setting your business up to get through the current challenges and continue to grow toward your success.