Employee Retention Credit 2021: What Business Owners Need to Know!
The SBA recently came out and said that it has stopped accepting new PPP applications from most lenders and is now covered by the Employee Retention Credit 2021.
The SBA informed lenders some time ago that the PPP general fund was out of money and that the only remaining funds available for new applications are $8 billion set aside for community financial institutions (CFIs), which are institutions that specifically work with businesses in underserved communities. But all is not lost, dear small business owners of America. If you missed out on the PPP or if you did not qualify for the PPP, don’t lose hope because you may still qualify for the employee retention credit on all those wages you didn’t claim for PPP forgiveness, and this employee retention credit could be worth up to $28,000 per employee.
And yes, even if you got PPP money, you can still get a piece of this employee retention credit cake.
This is big, a lot of small business owners don’t know about this, or they’ve heard about it, but they don’t know much about it, even many tax professionals don’t know the ins and outs of this thing because it’s new and a lot of these changes that are advantageous to business owners happened in the middle of tax season. So in this article I’m going to dig into the employee retention credit, why it’s so lucrative now in 2021, more lucrative, far more lucrative, in fact now than it was in 2020, 5x more lucrative at least. So even if you don’t own a business, be sure to share this video with business owners you know, this video could literally be worth tens of thousands of dollars for them. This can also apply for startup businesses.
And if you are a business owner and after you read this article you want to check to see if you are eligible for the scheme simply fill in the enquiry form and our team will quickly assess your application. Simply tell us a little about your business and your ballpark year-over-year revenue, and let’s see if we can get some more money back in your pocket because you can take this credit against your payroll taxes you pay by reducing your required employment tax deposits or you can request an advance payment of the credit using IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19.
We will not going to get into the intricacies of that form here or the Form 941 and all the payroll stuff because that’s the stuff your CPA should worry about. In this article I want to tell you what you need to know so you can go to your CPA and say, “Hey, what about this employee retention credit, why haven’t you told me about this?” so you can be informed and take ownership of your own tax situations, of your business’s tax situation to generate more cash flow in your business and more wealth for yourself.
Of course if you would like our expert help you have come to the right place.
Alright, now let’s dig into this and let’s talk about the employee retention credit or the ERC as some folks like to call it, before I get into this, I want to say that nothing in this article is to be taken as legal or tax advice, this article is for general informational purposes only. Another disclaimer here, for purposes of this article I am assuming that if you’re reading this you are a small business owner, which for employee retention credit purposes means one hundred or fewer employees for purposes of the 2020 credit and five hundred or fewer employees for purposes of the 2021 credit, if you have a company with over five hundred employees I imagine you have in-house counsel, in-house CPAs who are on top of this stuff, but I’m here for you small business owners who may work with a local tax professional who is so neck-deep in tax returns right now because the government extended the tax deadline to May 17 or volume is just the nature of their business that your tax professional hasn’t had the time to dig into the weeds here like I have.
So employee retention credit, why is it so lucrative for business owners in 2021 and why weren’t we talking about it in 2020, it’s been around since then, since the CARES Act? Why is it getting all this buzz now that it wasn’t last year? Yes, the employee retention credit has been around since the CARES Act that was passed over a year ago in March 2020, but the employee retention credit didn’t get much love last year in 2020 because of the PPP, the Paycheck Protection Program. Originally, in 2020, if you received a PPP loan as an employer, you were not eligible for the employee retention credit.
But the stimulus bill passed in December, the Consolidated Appropriations Act, as well as the American Rescue Plan Act, passed in February 2021, made changes to the ERC making it much more attractive. So basically the employee retention credit had a glow-up between 2020 and 2021, it went from the nerdy girl with unkempt eyebrows and thick glasses and her hair up in 2020 to the belle of the ball for business owners in 2021. Why? Why is the employee retention credit more attractive now thanks to the Consolidated Appropriations Act and the American Rescue Plan Act? I’ll tell you why, a few reasons.
First reason, the employee retention credit for both 2020 and 2021 is now available to PPP recipients, but of course you can’t double dip. You can’t get PPP for the hundred thousand dollars you paid your employees and then turn around and claim the employee retention credit on those wages as well. The government doesn’t look too fondly on paying your payroll for you through the PPP and then you claiming a credit against the taxes you pay the government on those wages that the government paid for you.
If you got PPP and you are eligible for the employee retention credit, then when you do your PPP forgiveness application, you need to choose the best covered period that will get you full PPP forgiveness but also maximize your employee retention credit. Also, for PPP forgiveness, you want to fill up that payroll bucket with as many costs as possible that don’t count for employee retention credit purposes. For example, you can’t claim the employee retention credit on state unemployment insurance contributions, but state unemployment insurance contributions count toward PPP forgiveness. So you’d want to dump all your state unemployment insurance contributions on your PPP forgiveness application to leave as much ordinary wages as possible to take the employee retention credit on.
So this can get very technical, very fast and it’s very situation specific in terms of optimizing PPP vs. ERC. I’m not going to dig into all that here, but just know that you really have to do the math when doing your PPP forgiveness to make sure you’re not leaving anything on the table in terms of the employee retention credit.
Another thing to note is you can’t deduct the wages you claimed the employee retention credit on, and that makes sense as well, why should the government give you a deduction for these wages that they already gave you a credit for? So essentially the credit is tax-effected. Surprisingly the employee retention credit is more attractive now than it was last year, and that is that it’s easier to qualify for the employee retention credit in 2021.
In 2020, for a quarter to qualify for the employee retention credit, you had to show a 50% decrease in gross receipts compared to the same calendar quarter in 2019.
But in 2021, for a quarter to qualify for the employee retention credit, you only need to show a 20% decrease in gross receipts compared to the same calendar quarter in 2019. So this means far more businesses will qualify. If a business, for example, experienced a 26% decline in gross receipts, comparing Q1 2019 to Q1 2021, and it was a similar story last year too. So they didn’t qualify for the 2020 employee retention credit first, because they got first round of PPP money and second because their business didn’t suffer that large 50% decline required to qualify for the employee retention credit last year.
But for 2021, at least for Q1, their business qualifies. Also, for 2021, for any quarter, you can elect to use the lookback quarter, meaning that, for example, even if your Q1 2021 gross receipts aren’t at least 20% lower than your Q1 2019 gross receipts, you can compare for purposes of determining eligibility for the employee retention credit for Q1 2021, you can compare Q4 2020 to Q4 2019. Implication here is that if you qualify for Q1 2021 based on Q1 2021’s gross receipts, you will also qualify for Q2 2021 since you qualified in the lookback quarter of Q1 2021.
What Business Owners Need to Know!
Same thing for Q2 to Q3 and Q3 to Q4, so basically if you just qualify for Q1 and Q3 2021, you also qualify for Q2 and Q4 based on the lookback. Also, even if you didn’t have a sufficient decline in revenue, you can qualify for the employee retention credit if you were required to fully or partially suspend operations in your business during any calendar quarter in 2020 or 2021 due to state or federal orders, in which case you are eligible for the employee retention credit during that period of full or partial shutdown.
In a common example, you own a restaurant, and your governor signed an executive order stating that you need to shut down indoor dining. That is an example of a partial shutdown. Also, not only are more businesses eligible for the employee retention credit thanks to these new laws, making PPP recipients eligible for the employee retention credit though not on the same wages and making more businesses eligible through the 20% decline threshold rather than the 50% decline threshold, but the 2021 credit is also more lucrative than the 2020 credit. This is because for 2020, the employee retention credit was equal to 50% of all qualified wages for 2020, the employee retention credit was equal to 50% of all qualified wages you paid employees between March 12, 2020, and December 31, 2020, with a limit of $10,000 in wages for that entire time period.
So the maximum 2020 credit per employee was $5,000.
Not bad, but that’s nothing compared to the 2021 credit because for 2021, the credit is equal to 70% of qualified wages per employee paid from January 1, 2021 through December 31, 2021, limited to $10,000 in wages per employee…for that entire time period? No.
Per quarter. So for 2021 the percentage is more (70% in 2021 vs. 50% in 2020) and you can take it on up to $10,000 in wages per employee per quarter, so we’re talking about a maximum credit of $7,000 per employee per quarter. If you’re eligible all four quarters, $7,000 times four is $28,000. That’s right, folks, the maximum 2021 employee retention credit is $28,000 per employee.
That’s huge. That’s a godsend to many business owners right now. So you see what I mean now, right, how the employee retention credit has gone from ugly duckling in 2020 to beautiful swan in 2021, right? And by the way, qualified wages includes employer-paid health insurance premiums.
This can huge for you and your business.
So this is a huge boon for small business owners. Can you take the employee retention credit on owner wages? For example, let’s say you have an LLC, it’s owned entirely by you, and you made the S corp election, and you pay yourself a reasonable salary.
Can you take the employee retention credit on the wages paid out of your S corporation to you, the 100% owner? Now, this is a big debate in the tax professional community right now. I’m not going to hang my hat on any one position until we get more clarification from the IRS on this, but if I had to lean one way or the other, I would lean in the direction of saying that owner wages insofar as we’re talking about someone who owns more than 50 percent of the business, do not qualify. I don’t want to get too technical here, but Section 2301(e) of the CARES Act — which created the employee retention credit — says that for purposes of the employee retention credit, “rules similar to the rule of sections 51(i)(1) and 280C(a) of the Internal Revenue Code of 1986 shall apply,” don’t get caught up on the 1986, that’s just the last time the Internal Revenue Code had a major overhaul, so it’s just referred to as the Internal Revenue Code of 1986.
The important part here is those other code sections reference.
Let’s start with 280C(a) because that’s the easy one. That is just saying that if you get a credit on some wages you pay in your business, you can’t double dip and take a deduction for those same wages. But now let’s talk about section 51(i)(1), which says, “No wages shall be taken into account…with respect to an individual who bears any of the relationships described in subparagraphs (A) through (G) of section 152(d)(2) to the taxpayer, or, if the taxpayer is a corporation, to an individual who owns, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation, or, if the taxpayer is an entity other than a corporation, to any individual who owns, directly or indirectly, more than 50 percent of the capital and profits interests in the entity.” So let’s focus on the clause that says “if the taxpayer is a corporation” because we’re assuming an S corp taxpayer here.
So this is saying that you don’t take into account wages with respect to an individual who owns, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation. That seems clear to me that owner wages do not qualify. Now, some tax professionals are looking at the employee retention credit qualified wages FAQs on the IRS website, and they’re looking at FAQ 59, which says, “Are wages paid by an employer to employees who are related individuals considered qualified wages?
They’re saying, “Look at the answer here. It’s only these relatives whose wages don’t count. And the IRS didn’t specifically say owner wages or spouse wages don’t count here, therefore owner wages must count.
The IRS website is not the tax code.
If there’s a disagreement between the IRS website and the tax code, and there are plenty, believe me, the tax code wins every single time. You can’t say, ‘Well, it said such and such on the IRS’s website!'” And in this case, it’s an argument by omission. You’re saying, “Well, the IRS website doesn’t explicitly say that owner wages are excluded so therefore they must be OK.” No, look at the code and the regs as well, though of course the code is more authoritative than the regs.
But on the other hand, the section in the CARES Act itself about this is admittedly vague, all it says is, “For purposes of this section, rules similar to the rules of sections 51(i)(1) and 280C(a) of the Internal Revenue Code of 1986 shall apply.” “Rules similar to…” What does that mean?
It’s up to Treasury to figure this out.
So my take on this right now, unless the IRS comes out and definitely says otherwise, I’m assuming that you can’t take the employee retention credit on owner wages. And it’s the same if it’s, you know, a husband-wife-owned business, let’s say both own 50%, well, sorry you’re related so neither of your wages qualify either, nor relatives you employ, children, siblings, etc. Alright, folks, that’s what I have for you here, of course I’m just scratching the surface especially with that interplay between the PPP and the employee retention credit.