The Employee Retention Credit (ERC) is a refundable tax credit against certain employment taxes. It was part of the original Coronavirus Aid, Relief, and Economic Security (CARES) Act and its purpose was to encourage businesses to keep employees on their payroll. At the time, if an employer took out a Paycheck Protection Program (PPP) loan they were not eligible for ERC. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, signed on Dec. 27, 2020, changed that. If an employer meets the criteria for ERC, they can claim the credit, but may not use the same wages they use for PPP loan forgiveness. The credit originally was only available for 2020 but now goes through December 31, 2021.
What employers are eligible?
Employers are eligible for the credit if they operate a trade or business during calendar year 2020, and now 2021, and experience either:
- The full or partial suspension of their business
- A significant decline in gross receipts during a calendar quarter
a. 2020 is a 50% decline when compared to 2019
b. 2021 is a 20% decline when compared to 2019
What wages are eligible?
Qualified wages include:
- Wages and compensation paid to employees that are subject to Social Security and Medicare taxes
a. This means commodity wages are excluded
b. Wages paid to related individuals DO NOT qualify
- Employer paid qualified health plan expenses
How much is the credit?
- For 2020, the total qualified wages are capped at $10,000 per employee for the year. The credit is 50% for a total credit amount of $5,000 per employee.
- For 2021, the total qualified wages are still capped at $10,000 per employee, but now it’s per quarter. The credit is 70% for a total credit amount of $7,000 per employee. So, if an employer qualifies in every quarter, they could claim a $28,000 credit per employee for the year.
What should an employer do?
This is a high-level summary of the Employee Retention Credit; there are many more details involved and each situation is unique. Employers should reach out to their farm accounting or tax specialist and ask to have their accounting and payroll information reviewed to see if they are eligible for ERC. If the employer’s business was not shut down, the specialist will look at quarterly income statements to determine if there was a decline in gross receipts that meets the ERC criteria. They will also need details about any PPP loans taken out. If it looks like the employer is eligible to claim ERC, an amended 2020 payroll tax return can be filed. The specialist will also monitor 2021 on a quarterly basis, and if any quarters qualify, the credit can offset monthly payroll tax deposits that would need to be made. Any remaining credit will be refunded when the payroll tax return is filed.