Employee Retention Credit Changes

Changes are coming to give your small business up to $28,000 for each employee! As of 3/8/21, the latest stimulus legislation pending approval in the House includes changes that make the Employee Retention Credit broadly available to small businesses. To determine if you qualify, read on about the specific changes, get your financials ready, and be ready to apply when Biden signs this bill into law.

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) is a payroll tax credit for businesses with fewer than 100 that either:

  1. Were forced to shut down due to government mandates related to Covid-19, or
  2. Experienced “significant declines” gross receipts (aka revenue).

Here’s the fine print (skip ahead to avoid technical accounting lingo):

  • “Significant declines” are currently defined as 50% decrease on a year-over-year basis, measured for a calendar quarter in 2020; and 20% decrease in 2021 (versus 2019.)
  • The credit is worth 50% of wages paid in 2020, up to $5000 per employee, and 70% of wages paid, up to $7,000 per employee per quarter in 2021.
  • Additionally, businesses with 500 or fewer employees and revenue declines of 20% in 2021 may also apply for the ERC.
  • Wages paid for by PPP funds do not qualify for the ERC.

Confused? Do not worry, the important thing to know is that you need to have either been either shut down or faced revenue declines to qualify.

Changes to the Employee Retention Credit

In the legislation expected to go into law this week, the timeline extends from June 30th, 2021 to December 31st, 2021. This opens up a huge swath of small businesses who experienced relatively moderate downturns.

Employee Retention Credit v. PPP round 2

The ERC has many advantages against the PPP round 2:

  • Easier to qualify. The PPP round 2 required 25% revenue declines plus dozens of legal certifications, whereas the proposed changes to the ERC only require 20% revenue declines in 2021 and no certifications.
  • No strings attached. The PPP has strict requirements about how to use the funds and requires a complex forgiveness application. The ERC has no strings attached – since you already paid the wages, you get the money back with no additional requirements or reporting.
  • Possibly more money. Depending on the number of months your business experienced a gross receipts declines, the ERC may be worth more money than the PPP. For example, a business with 2 quarter’s qualified declines paying an average salary of $50,000 would get 3.4 months’ worth of wages credited in the ERC – quite a bit more than the 2.5 months’ the PPP allows.

How to apply for the Employee Retention Credit

At time of writing the changes to the ERC have not yet been passed into law. However, you can do things to prepare your business for its approval:

  1. Determine your eligibility. Review your financials or contact your accountant to determine if your business will meet the 50% 2020 threshold or 20% 2021 threshold.
  2. Research your payroll provider’s ERC process. If you use a payroll provider such as Gusto or ADP, you will apply for the ERC through their portal. Take a look at the setup now so you are familiar with their requirements and process. If you perform your own payroll, take a look at the IRS guidance on the ERC.
  3. Wait for the legislation to be signed into law. Once you have fully prepared, simply wait for Biden to sign the new bill into law.

Unsure if you qualify? Too busy to figure it out? We are here to help. CFOshare’s financial professionals supplement your accounting team to keep your business on track and growing. Contact us if you’d like to learn more.

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