Why Employee Retention Credit Taxable Income

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 staff members and after that turn around and claim the employee retention credit on those salaries as well. The federal government does not look too fondly on paying your payroll for you through the PPP and then you declaring a credit against the taxes you pay the government on those incomes that the government paid for you. That makes sense. Now, there's some planning here. If you got PPP and you are qualified for the employee retention credit, then when you do your PPP forgiveness application, you require to choose the very best covered period that will get you full PPP forgiveness however likewise optimize your employee retention credit.



Also, for PPP forgiveness, you wish to fill that payroll container with as many costs as possible that do not count for employee retention credit purposes. You can't claim the employee retention credit on state joblessness insurance contributions, however state unemployment insurance coverage contributions count toward PPP forgiveness, see? You 'd desire to dispose all your state joblessness insurance coverage contributions on your PPP forgiveness application to leave as much common salaries as possible to take the employee retention credit on.

So this can get really technical very quickly and it's very situation particular in terms of optimizing PPP vs. ERC and my company has tools to figure this stuff out for you, I'm not going to dig into all that here, however simply understand that you really have to do the mathematics when doing your PPP forgiveness to ensure you're not leaving anything on the table in terms of the employee retention credit. Another thing to note is you can't subtract the wages you claimed the employee retention credit on, which makes sense also, why should the government offer you a deduction for these incomes that they already offered you a credit for? Essentially the credit is tax-effected. Alright, sorry for getting a little sidetracked there, I simply love discussing this things, but let's discuss another factor why the employee retention credit is more attractive now than it was last year, which 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 reveal a 50% decrease in gross invoices compared to the very same calendar quarter in 2019.

In 2021, for a quarter to certify for the employee retention credit, you just need to show a 20% decline in gross invoices compared to the same calendar quarter in 2019. This indicates far more services will certify. My company, for example, experienced a 26% decline in gross receipts, comparing Q1 2019 to Q1 2021, and it was a similar story last year too.

I didn't certify for the 2020 employee retention credit initially, due to the fact that I got very first round of PPP money and 2nd since my company didn't suffer that big 50% decrease required to qualify for the employee retention credit last year.But for 2021, at least for Q1, yeah, my company certifies. For 2021, for any quarter, you can elect to utilize the lookback quarter, meaning that, for example, even if your Q1 2021 gross invoices aren't at least 20% lower than your Q1 2019 gross invoices, you can compare for purposes of figuring out 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 upon Q1 2021's gross invoices, you will likewise receive Q2 2021 given that you certified in the lookback quarter of Q1 2021.

Exact same thing for Q2 to Q3 and Q3 to Q4, so basically if you simply qualify for Q1 and Q3 2021, you also receive Q2 and Q4 based upon the lookback. Likewise, even if you didn't have a sufficient decrease in earnings, you can qualify for the employee retention credit if you were required to fully or partially suspend operations in your company throughout any calendar quarter in 2020 or 2021 due to state or federal orders, in which case you are qualified for the employee retention credit during that period of partial or full shutdown.

Common example, you own a dining establishment, and your guv signed an executive order stating that you need to shut down indoor dining. That is an example of a partial shutdown. Not only are more companies eligible for the employee retention credit thanks to these brand-new laws, making PPP recipients qualified for the employee retention credit though not on the same incomes and making more services eligible through the 20% decline threshold rather than the 50% decline limit, however the 2021 credit is also more financially rewarding than the 2020 credit.

This is due to the fact that for 2020, the employee retention credit amounted to 50% of all qualified wages for 2020, the employee retention credit was equal to 50% of all qualified incomes you paid staff members in between March 12, 2020, and December 31, 2020, with a limit of $10,000 in incomes for that whole time duration. So the optimum 2020 credit per staff member was $5,000. Okay, but that's absolutely nothing compared to the 2021 credit since for 2021, the credit is equivalent to 70% of qualified salaries per worker paid from January 1, 2021 through December 31, 2021, limited to $10,000 in wages per worker ... for that entire time duration? No. Per quarter. So for 2021 the portion is more (70% in 2021 vs. 50% in 2020) and you can take it on as much as $10,000 in incomes per staff member per quarter, so we're discussing a maximum credit of $7,000 per worker per quarter. If you're eligible all 4 quarters, $7,000 times 4 is $28,000. That's right, folks, the maximum 2021 employee retention credit is $28,000 per employee. That's substantial. That's a godsend to many organization owners today. You see what I mean now, right, how the employee retention credit has gone from ugly duckling in 2020 to lovely swan in 2021? And by the way, by the method, certified earnings includes employer-paid medical insurance premiums.


If you got PPP and you are qualified for the employee retention credit, then when you do your PPP forgiveness application, you require to select the best covered duration that will get you full PPP forgiveness but also maximize your employee retention credit.



Alright, sorry for getting a little sidetracked there, I simply love talking about this things, however let's talk about another reason why the employee retention credit is more attractive now than it was last year, and that is that it's simpler to qualify for the employee retention credit in 2021. I didn't qualify for the 2020 employee retention credit initially, because I got very first round of PPP cash and 2nd since my company didn't suffer that big 50% decline required to certify for the employee retention credit last year.But for 2021, at least for Q1, yeah, my company qualifies. Not just are more services qualified for the employee retention credit thanks to these new laws, making PPP recipients eligible for the employee retention credit though not on the same salaries and making more businesses eligible through the 20% decline limit rather than the 50% decline threshold, however the 2021 credit is also more rewarding than the 2020 credit.

Not bad, however that's nothing compared to the 2021 credit since for 2021, the credit is equivalent to 70% of qualified salaries per worker paid from January 1, 2021 through December 31, 2021, restricted to $10,000 in incomes per worker ... for that whole time period?