The Employee Retention Tax Credit
Can Your Organization Benefit From This Credit? – What You Need To Know
You may have heard about the federal Employee Retention Tax Credit. Many organizations are evaluating this tax credit to determine what benefits the credit may bring their organization. With recently issued guidance from the IRS on implementing this credit, and recently enacted legislation extending the availability of the credit, now may be the time to consider if your organization can benefit from this valuable credit.
For eligible organizations, this credit may provide an organization a 2020 tax credit of up to $5,000 annually for each qualified employee. For 2021, the credit amount has been significantly expanded for eligible organizations, providing for a tax credit of up to $7,000 for each eligible employee, for each quarter of the year.
Presented below is a brief overview of the credit. As with any tax credit, determining your eligibility for the credit, and calculating the credit is a complicated process with many rules and documentation requirements. For more information on the credit please feel free to contact your Nichols Cauley representative or contact Michael Johnston at mjohnston@nicholscauley.com or at 678-967-9873.
So what is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERC) is a business tax incentive program originally created through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) focused on helping employers keep paying employees while working through the COVID-19 pandemic. The CARES Act established the availability of this credit through December 31, 2020, with subsequent legislation extending the credit through December 31, 2021.
Is My Organization Eligible For The Credit?
To be eligible, an organization must actively carry on a trade or business during 2020 or 2021, (including a non-profit organization) and meet one of the following tests:
- Gross Receipts Test: An organization has experienced a significant decline in quarterly gross receipts, comparing comparable calendar quarters in 2019 to comparable calendar quarters in 2020 and 2021.
- For 2020 compared to 2019, a significant decline is defined as a reduction in any calendar quarter in 2020 of at least 50% compared to the comparable calendar quarter in 2019.
- For 2021 compared to 2019, a significant decline is defined as a reduction in any calendar quarter in 2021 of at least 20% compared to the comparable calendar quarter in 2019.
- Governmental Order Test: An organization experienced a calendar quarter in 2020 or 2021 “in which the operation of the trade or business is fully or partially suspended during
the calendar quarter due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19.
If My Organization Qualifies – How Much Is the Credit?
The amount of the credit is based on qualified wages paid by an organization during an eligible quarter. For 2020, eligible wages are capped at $10,000 annually with the credit calculated as 50% of eligible wages per employee, or a maximum credit of $5,000 per eligible employee. For an organization with 20 employees, that could mean a credit of as much as $100,000.
For 2021, eligible wages are capped at $10,000 per qualifying quarter for each eligible employee, with the credit equal to 70% of eligible wages of each employee, or a maximum of $7,000 per employee for each eligible quarter. For any quarter in 2021 where an organization meets the eligibility requirements, that could result in a tax credit of up to $7,000 for each eligible employee.
An eligible organization claims the credit on the organizations Form 941-Employers Quarterly Federal Tax Return, as a refund of taxes previously paid or as a reduction in the submission of future withholding tax payments.
How Do I Determine If My Organization Qualifies for the Credit?
Every organization and situation are unique. The many rules and documentation requirements of this credit are extensive. The application of the rules must be coordinated with the provisions of any Paycheck Protection Program loan received by an organization. Nichols, Cauley & Associates, LLC can assist you with evaluating this credit for your organization.
For more information feel free to contact your Nichols Cauley representative, or contact Michael Johnston at mjohnston@nicholscauley.com or at 678-967-9873.