The first quarter of 2021 has been one for the record books with legislation enacted to strengthen our economy through continued pandemic funding and taxpayer relief. To put it simply – The Consolidated Appropriations Act of 2021 (Con App)and the American Rescue Plan Act (ARPA) have transformed the playing field. Through the Con App, taxpayers can now qualify for both Paycheck Protection Program (PPP) loans and Employee Retention Credits (ERC) simultaneously, as long as the specific payroll costs are used only once. In other words, you cannot use an employee’s wages to claim both an ERC credit and PPP loan forgiveness for the same day of pay. As the first quarter of 2021 comes to an end, employers will have substantial planning and strategizing to do in order to maximize the benefits offered by both the ERC and PPP loans.
You can revisit the basics of the ERC by reading our past blog here. Below we will review the additional guidance we now have on the interplay of the ERC and PPP loans.
Maximum Credits Available Under the Employee Retention Credit
As a result of the ARPA, the 2021 ERC has been extended and will currently end on September 30, 2021. The amount of the credit is based upon eligible payroll costs for each employee, up to $10,000 on a quarter-by-quarter basis at 70%. Therefore, the maximum credit is 70% of eligible payroll costs, or $7,000 per employee, per quarter. In 2020, the credit was based upon annual payroll costs at 50%, or a maximum credit per employee, per year of $5,000.
What are payroll costs? The guidance clearly indicates that payroll costs are not limited to wages paid. In addition to wages paid, qualified health expenses are eligible for the ERC. Qualified health expenses generally include both employer and employee pretax payments for insurance under a qualified health plan. The formula for determining qualified expenses is dependent on the number of employees an employer has.
Qualifying for the Employee Retention Credit
In 2021, the ease of qualifying for the ERC has lessened. You can now be eligible with a 20% decline in gross receipts measured on a comparable quarterly basis. For example, a decrease of 20% or more in quarterly gross receipts for the quarter ending March 31, 2021 in comparison to March 31, 2019 would make you eligible. There is also a safe harbor that allows you to use the previous quarter such as the quarter ended December 31, 2020 in comparison to December 31, 2019. For the safe harbor, you would need to show a 20% decline in gross receipts in the comparable quarters.
Note that you can also qualify for the ERC in 2021 if you had a government order for a full or partial shutdown of your business.
How to Apply for the Employee Retention Credit
The ERC is claimed on federal payroll tax returns (Form 941) based upon the quarter the payroll costs were paid. As many organizations use third-party payroll providers in preparing and submitting payroll returns, it is extremely important to communicate with these providers on how to implement the ERC once you determine that you are eligible. These payroll providers will need information from you on the wages that you will be using for the ERC. In some instances, you will need to set up pay codes for the ERC and these pay codes will be used by the provider to prepare and report the credit on Form 941. The credit can also be claimed through an amended Form 941; however, this would include additional costs and the credit would be delayed to you.
The Strategy for Leveraging the Employee Retention Credit and PPP Loans
While we have discussed the ERC at length, the PPP loan forgiveness still provides a greater benefit to most taxpayers. As such, employers should be focused on applying payroll costs first to PPP loan forgiveness. From there, you will want to provide the payroll provider with the payroll costs you will use the ERC for. But beware – any wages that will be claimed under a loan forgiveness application for PPP and used for the ERC may result in denial of a portion of your loan forgiveness. In some instances, it may be beneficial to delay claiming the ERC on your payroll tax filings and later amend the filings so you can appropriately determine the payroll costs used for the ERC vs. the PPP loan. Although this may result in additional costs and time, the benefits of leveraging both the ERC and PPP will outweigh these costs.
Here are some considerations to keep in mind as you apply for the ERC:
ERC Implementation without PPP Loan Funding
- Communicate with payroll provider before quarter end on ERC implementation as you will need to specify wages that are applicable for the ERC.
- Track each of your employee wages paid per quarter, up to $10,000 (maximize the benefit of $7,000 per employee).
- If communication is not made timely on the ERC wages, work with your payroll provider to amend Form 941s.
ERC Implementation with PPP Loan Funding
- Create a timeline and plan for utilizing PPP loan funds.
- Determine the form you will use for PPP loan forgiveness and identify non-payroll costs that are available to you, therefore saving you payroll costs to be used for the ERC.
- Determine wages that are available for use of the ERC.
- Communicate with payroll provider on the ERC implementation and wages to use for the ERC.
- Consider amending Form 941s to properly allocate wages between the ERC and PPP loan.
For further guidance on how to apply for the Employee Retention Credit or assistance with allocating payroll costs to maximize your PPP loan forgiveness and applicability for the ERC, contact Cray Kaiser today.
Please note that this blog is based on tax laws effective in March 2021, and may not contain later amendments. Please contact Cray Kaiser for the most recent information.