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How to Adjust Tax Plans for the Employee Retention Tax Credit

The Employee Retention Credit (ERC) has been extended through the end of the year. Are your clients taking advantage of it?

Those that claim the credit in 2021 will see a reduction in their tax liability, and because the credit is refundable, some of your clients may even get a refund for participating. Help your clients optimize their ERC tax savings by running their information through your tax planning software. With a quality tax software, you can estimate just how much money your clients will save under the ERC so they can make good strategic decisions for where and how to direct those funds.

Credit Timeline

The Employee Retention Tax Credit (ERC) was initially created with the Coronavirus Aid, Relief, and Economic Security (CARES) Act back in March of 2020, but it has been extended and expanded a couple times since then. To help your clients better understand the credit that’s available to them in 2021, let’s look at a timeline of the credit from its inception until now.

March 2020

CARES Act 

In March of 2020, President Trump signed the CARES Act into law which established the ERC. Under the tax credit’s first iteration, employers could claim a 50% credit of up to $10,000 of qualified wages paid to employees between March 13, 2020 and December 31, 2020. This means that each employee the business retained could yield up to a $5,000 tax credit.

The ERC had two different calculations: employers with fewer than 300 employees could calculate the ERC using wages of all employees whether those employees were currently working or being paid to stay home. Large employers could only claim the credit using the wages of employees not currently working.

To be eligible for the credit, employers must have experienced either (1) a full or partial suspension of operations in their business because of governmental orders (like a mandatory shut down), or (2) at least a 50% decline in gross receipts compared to the same calendar quarter in 2019.

Under the CARES Act, the ERC was only made available through December 31, 2020.

December 2020

Consolidated Appropriations Act, 2021

In December 2020, President Trump signed his second COVID relief bill into law. The Consolidated Appropriations Act, 2021 (CAA) expanded the ERC in a few ways.

First, the CAA extended the program through the second quarter of 2021.

Second, the CAA lowered the threshold for eligibility. Beginning January 1, 2021, businesses could claim the credit if they experienced just a 20% reduction in gross receipts rather than a 50% reduction. Additionally, more employers were eligible for the full credit. The limitations placed upon large employers kicked in once a business reported 500 or more employees (compared to the 300-employee threshold established by the CARES Act). Raising this threshold means that more employers’ tax credits can be calculated using all employees’ salaries, not just the salaries of employees paid to stay home.

Third, the CAA increased the credit to be 70% of up to $10,000 of qualified quarterly wages (up from 50%), which means that each employee could generate up to a $7,000 credit per quarter.

Fourth, the law removed the much-contested rule that businesses could not both apply for PPP loan forgiveness and claim the ERC. Going forward, businesses that have already requested (or plan to request) forgiveness for PPP loans can also claim the ERC as long as they use different wages to qualify for each. No double dipping!

March 2021

American Rescue Plan Act of 2021 

The American Rescue Plan (ARP) was President Biden’s first coronavirus relief package, and he boosted the ERC even further. He extended the program another two quarters, allowing businesses to take credits for employee retention throughout the entire calendar year of 2021. The credit is still calculated at 70% of qualified wages paid each quarter, but the ARP established a $50,000 per-quarter maximum for employers of recovery startup businesses (RSBs), which are businesses that began on or after February 5, 2020 and had no more than $1 million of annual gross receipts.

The ARP also established a new category of employers: Severely Financially Distressed Employers (SFDE). SFDEs have more than a 90% reduction of gross receipts. These businesses are not bound by the large employer threshold limitation. This means that SFDEs with any number of employees can calculate their credit using the wages of all employees, not just those paid to stay home.

This summary chart doesn’t include all the differences between the three legislations, but it provides the basic information that you can use when discussing the ERC with your clients.

CARES ActCAAARP
Time Period CoveredMarch 13, 2020 – December 31, 2020January 1, 2021 –
June 30, 2021

July 1, 2021 –
December 31, 2021

Amount of Credit50% of qualified wages paid between the covered period70% of qualified wages paid each quarter, including the costs of health benefits70% of qualified wages paid each quarter, including the costs of health benefits
Maximum Credit$5,000 per employee$7,000 per employee per quarter$7,000 per employee per quarter
Large Employer Calculation Threshold300 employees500 employees500 employees
Decline in Gross ReceiptsAt least 50%At least 20%At least 20%

Estimate the Credit for Your Clients

There are a few ways you can estimate your client’s credit, but the simplest way is to use a software program that does the calculation for you. Our tax planning software can calculate the ERC for your clients and can then incorporate that information into their overall tax plan. However, there are a few things you’ll need to do before the software can calculate the credit.

Make sure your client had a decline in gross receipts.

If your client experienced a qualifying closure due to a governmental order, you can stop here – they will be eligible for the credit. If not, they may be eligible for the credit based on their decline in gross receipts.

Your client’s decline in gross receipts will be determined by comparing the current quarter’s gross receipts to the equivalent quarter from 2019. For ERC calculations in 2021, your clients can elect to instead compare the gross receipts from the immediately preceding quarter with the equivalent quarter from 2019. For example, your client can calculate their second quarter 2021 credit by comparing their gross receipts from the first quarter of 2021 with their gross receipts from the first quarter of 2019.

Confirm number of employees.

The large employer calculation will kick in if your client reported 500 or more full-time employees in 2019, so it’s important to count how many they had during that time. The IRS considers “full-time employees” to be an employee who averaged at least 30 hours of service per week (or 130 hours of service in a month). This calculation is done each month in 2019, and each month’s tally should be averaged over the number of months your client was in business. If your client started operations in 2020, the calculation will be the same, but you will use 2020 employment data instead of 2019.

Estimate qualified wages.

Ask your clients to estimate the wages they will pay to their employees during the periods in which they experienced a decline in gross receipts. These expenses include salaries and hourly wages, of course, but they also include the costs to provide healthcare.

Use the ERC In Your Client’s Tax Plans

The next time you meet with your clients, talk to them about your tax planning services. Compliance is a necessary beast, but where you can add the most value to your client is in tax planning. Your tax plans can help them make informed decisions about their business, so it’s important that your tax planning software is as detailed as possible. Corvee Tax Planning software has an ERC section where you can input your client’s estimated credit, and produces a simple yet informational deliverable that shows your client how each item of their tax plan – like the ERC – affects their overall tax position.

 If you’d like to see a demo of our software today, please reach out to us today.

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