Why Employee Retention Credit Taxable Income

Very first reason, the employee retention credit for both 2020 and 2021 is now readily available to PPP recipients, but obviously you can't double dip. You can't get PPP for the hundred thousand dollars you paid your staff members and then turn around and claim the employee retention credit on those earnings. The government does not look too fondly on paying your payroll for you through the PPP and after that you declaring a credit against the taxes you pay the federal government on those earnings that the federal government spent for you. That makes sense. Now, there's some planning here. If you got PPP and you are eligible for the employee retention credit, then when you do your PPP forgiveness application, you need to select the best covered duration that will get you full PPP forgiveness but likewise optimize your employee retention credit.



For PPP forgiveness, you want to fill up that payroll bucket with as lots of costs as possible that don't count for employee retention credit purposes. You can't declare the employee retention credit on state unemployment insurance contributions, however state unemployment insurance contributions count towards PPP forgiveness, see? So you 'd wish to discard all your state joblessness insurance contributions on your PPP forgiveness application to leave as much normal incomes as possible to take the employee retention credit on.

This can get very technical very quickly and it's extremely situation particular in terms of optimizing PPP vs. ERC and my company has tools to figure this things out for you, I'm not going to dig into all that here, however just understand 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 subtract the earnings you declared the employee retention credit on, and that makes sense also, why should the federal government give you a deduction for these earnings that they already gave you a credit for? Essentially the credit is tax-effected. Alright, sorry for getting a little sidetracked there, I simply love speaking about this things, but let's talk about another reason why the employee retention credit is more attractive now than it was in 2015, which is that it's easier to get approved for the employee retention credit in 2021. In 2020, for a quarter to get approved for the employee retention credit, you needed to reveal a 50% reduction in gross receipts compared to the exact same calendar quarter in 2019.

However in 2021, for a quarter to get approved for the employee retention credit, you only need to reveal a 20% decrease in gross invoices compared to the same calendar quarter in 2019. This suggests far more services will qualify. My company, for example, experienced a 26% decrease in gross invoices, comparing Q1 2019 to Q1 2021, and it was a similar story in 2015 too.

So I didn't get approved for the 2020 employee retention credit initially, because I got preliminary of PPP cash and 2nd because my organization didn't suffer that big 50% decline needed to get approved for the employee retention credit last year.But for 2021, a minimum of 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 receipts aren't at least 20% lower than your Q1 2019 gross receipts, you can compare for functions of identifying 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 likewise certify for Q2 2021 because you qualified in the lookback quarter of Q1 2021.

Very same thing for Q2 to Q3 and Q3 to Q4, so generally if you just certify for Q1 and Q3 2021, you likewise certify for Q2 and Q4 based upon the lookback. Also, even if you didn't have an adequate decline in profits, you can receive the employee retention credit if you were required to fully or partially suspend operations in your company during any calendar quarter in 2020 or 2021 due to state or federal orders, in which case you are qualified for the employee retention credit throughout that duration of full or partial shutdown.

Typical example, you own a dining establishment, and your guv signed an executive order specifying that you require to close 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 eligible 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 threshold, but the 2021 credit is likewise more profitable than the 2020 credit.

This is because for 2020, the employee retention credit was equivalent to 50% of all certified incomes for 2020, the employee retention credit amounted to 50% of all qualified earnings you paid employees in between March 12, 2020, and December 31, 2020, with a limitation of $10,000 in salaries for that entire time period. The optimum 2020 credit per employee was $5,000. Okay, but that's absolutely nothing compared to the 2021 credit due to the fact that for 2021, the credit is equal to 70% of qualified earnings per worker paid from January 1, 2021 through December 31, 2021, limited to $10,000 in salaries per worker ... for that whole period? No. Per quarter. For 2021 the portion is more (70% in 2021 vs. 50% in 2020) and you can take it on up to $10,000 in wages per worker per quarter, so we're talking about an optimum credit of $7,000 per staff member per quarter. If you're eligible all four quarters, $7,000 times four is $28,000. That's right, folks, the optimum 2021 employee retention credit is $28,000 per employee. That's substantial. That's a godsend to many company owner today. You see what I suggest now, right, how the employee retention credit has gone from awful duckling in 2020 to stunning swan in 2021? And by the method, by the way, qualified wages includes employer-paid health insurance coverage 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 pick the best covered duration that will get you full PPP forgiveness however likewise maximize your employee retention credit.



Alright, sorry for getting a little sidetracked there, I just love talking about this things, but let's talk about another factor why 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. I didn't qualify for the 2020 employee retention credit first, due to the fact that I got first round of PPP cash and second due to the fact that my organization didn't suffer that large 50% decline needed to qualify for the employee retention credit last year.But for 2021, at least for Q1, yeah, my service qualifies. Not just are more businesses qualified 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 earnings and making more companies eligible through the 20% decrease threshold rather than the 50% decline threshold, however the 2021 credit is also more lucrative than the 2020 credit.

Not bad, but that's nothing compared to the 2021 credit due to the fact that for 2021, the credit is equal to 70% of certified earnings per staff member paid from January 1, 2021 through December 31, 2021, limited to $10,000 in wages per worker ... for that entire time duration?