Why Employee Retention Credit Under The Cares Act

Very first factor, the employee retention credit for both 2020 and 2021 is now offered 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 salaries. The government does not look too fondly on paying your payroll for you through the PPP and then you claiming a credit against the taxes you pay the federal government on those earnings that the government paid for you. So 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 need to select the very best covered period that will get you complete PPP forgiveness however likewise maximize your employee retention credit.



Also, for PPP forgiveness, you desire to fill that payroll container with as numerous expenses as possible that do not count for employee retention credit purposes. For instance, you can't claim the employee retention credit on state joblessness insurance coverage contributions, however state joblessness insurance contributions count toward PPP forgiveness, see? So you 'd want to dump all your state unemployment insurance contributions on your PPP forgiveness application to leave as much ordinary salaries as possible to take the employee retention credit on.

This can get really technical very fast and it's very circumstance particular in terms of enhancing PPP vs. ERC and my firm has tools to figure this things 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 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 incomes you declared the employee retention credit on, and that makes good sense also, why should the government give you a reduction for these incomes that they currently offered you a credit for? Basically the credit is tax-effected. Alright, sorry for getting a little sidetracked there, I just like speaking about this stuff, however let's speak about another reason the employee retention credit is more attractive now than it was last year, which is that it's much 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 had to show a 50% decline in gross receipts compared to the same calendar quarter in 2019.

But in 2021, for a quarter to get approved for the employee retention credit, you just need to reveal a 20% decrease in gross receipts compared to the exact same calendar quarter in 2019. So this indicates even more organizations will qualify. My organization, for example, experienced a 26% decline in gross receipts, comparing Q1 2019 to Q1 2021, and it was a comparable story last year too.

I didn't qualify for the 2020 employee retention credit initially, due to the fact that I got first round of PPP money and 2nd due to the fact that my business 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 business qualifies. Likewise, for 2021, for any quarter, you can choose to use the lookback quarter, implying that, for instance, even if your Q1 2021 gross invoices aren't at least 20% lower than your Q1 2019 gross receipts, you can compare for functions of determining eligibility for the employee retention credit for Q1 2021, you can compare Q4 2020 to Q4 2019. Ramification here is that if you get approved for Q1 2021 based on Q1 2021's gross invoices, you will also receive Q2 2021 given that you qualified in the lookback quarter of Q1 2021.

Exact same thing for Q2 to Q3 and Q3 to Q4, so basically if you simply get approved for Q1 and Q3 2021, you likewise certify for Q2 and Q4 based on the lookback. Even if you didn't have an enough decline in profits, you can certify for the employee retention credit if you were needed to completely or partly suspend operations in your company throughout any calendar quarter in 2020 or 2021 due to state or federal orders, in which case you are eligible for the employee retention credit throughout that duration of partial or complete shutdown.

Typical example, you own a dining establishment, and your governor signed an executive order specifying that you need to shut down indoor dining. That is an example of a partial shutdown. Not only are more companies 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 very same salaries and making more businesses eligible through the 20% decline threshold rather than the 50% decline threshold, however the 2021 credit is also more rewarding than the 2020 credit.

This is due to the fact that for 2020, the employee retention credit was equivalent to 50% of all qualified wages for 2020, the employee retention credit amounted to 50% of all certified incomes you paid employees between March 12, 2020, and December 31, 2020, with a limitation of $10,000 in incomes for that entire time duration. So the optimum 2020 credit per worker was $5,000. Okay, but that's nothing compared to the 2021 credit because for 2021, the credit amounts to 70% of qualified incomes per worker paid from January 1, 2021 through December 31, 2021, restricted to $10,000 in wages per employee ... for that entire period? No. Per quarter. So for 2021 the portion is more (70% in 2021 vs. 50% in 2020) and you can take it on up to $10,000 in incomes per staff member per quarter, so we're speaking about an optimum credit of $7,000 per worker per quarter. If you're qualified 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. So you see what I imply now, right, how the employee retention credit has gone from unsightly duckling in 2020 to beautiful swan in 2021, right? And by the way, by the method, certified earnings consists of employer-paid health insurance premiums.


If you got PPP and you are qualified for the employee retention credit, then when you do your PPP forgiveness application, you need to pick the best covered period that will get you full PPP forgiveness however also maximize your employee retention credit.



Alright, sorry for getting a little sidetracked there, I just like talking about this stuff, but let's talk about another factor why the employee retention credit is more appealing 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 initially, since I got very first round of PPP money and 2nd 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 services eligible for the employee retention credit thanks to these new laws, making PPP recipients eligible for the employee retention credit though not on the very same incomes and making more services eligible through the 20% decline threshold rather than the 50% decrease limit, however the 2021 credit is likewise more financially rewarding than the 2020 credit.

Not bad, however that's nothing compared to the 2021 credit because for 2021, the credit is equivalent to 70% of qualified earnings per employee paid from January 1, 2021 through December 31, 2021, limited to $10,000 in earnings per employee ... for that entire time period?