With the approval of both the American Rescue Plan Act and the CARES Act, the government appears to be attempting to go “full Oprah” with all of the credits, grants, and other goodies thrown to Charlotte small businesses...
While reports about the latest 1,400 dollar stimmies dominate the news, the American Rescue Plan (ARP) Act of 2021 also extends the Employee Retention Incentive, a beneficial tax credit for Charlotte small businesses impacted by COV-19 (ERC for short).
And I decided to write about it today because I've noticed some false information being spread by some of my colleagues accountants, and I felt you should know the truth.
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For Charlotte businesses, there's a big update on employee retention credits.
“Be so good they can’t ignore you.” – Steve Martin
Adjustments to the ERC made as part of the American Rescue Plan Act (ARPA) follow changes made to the ERC as part of the Consolidated Appropriations Act (CAA — yep, Congress loves acronyms) on Dec. 27.
While the IRS has yet to offer guidance on the Employee Retention Credit for 2021, we may go directly to the source and take apart the law to check for differences from the original CARES Act of 2020.
In particular, how it affects YOU and your Charlotte company.
What is the Employee Retention Credit (ERC) and how does it work? In a nutshell, the ERC is a refundable tax credit on the employer portion of Social Security taxes that your business pays if you opt to keep your employees on payroll rather than lay them off because of local government shutdown orders connected to the epidemic.
Essentially, Uncle Sam is thanking you, the Charlotte business owner, for not forcing your employees out the door and onto the unemployment line.
One of the concerns with the ERC in 2020 was that you couldn't claim it if you had also taken out a PPP loan. This issue was resolved retroactively by the CAA in December. You can still claim the ERC for payroll periods that were funded with PPP loan profits, but you can now claim the ERC for payroll periods that were not funded with PPP loan monies. For example, if you pay your employees monthly and used PPP funding to make payroll in May and June 2020, you will not be able to claim the ERC on your Form 941 for those months. You can, however, claim the ERC for the payroll periods of March 13, 2020, through April 30, 2020, and then again for the payroll periods of July 1, 2020, through December 31, 2020.
So, if your business took out a PPP loan in 2020 and never claimed the ERC on your quarterly payroll tax filings, it might be worth amending those reports and getting a refund on this tax credit.
What is the ERC's cost? For each full-time employee kept on payroll for the whole period between March 13 and December 31, eligible employers might obtain a tax credit of up to 50% of qualified wages paid, up to a maximum of $5,000. This has been significantly increased for 2021, with up to 70% of eligible salaries covered, with a cap of 7,000 dollars per employee, per calendar quarter. While the CAA only extended and enhanced these provisions until June 30, 2021, the ARP picks up the credit for quarters following June 30 and extends it to the end of 2021.
In other words, while the maximum credit for the entire year of 2020 was only $5,000 per employee, the maximum credit for the entire year of 2021 is $28,000 per employee.
Who can apply for the ERC?
When it comes to collecting this tax credit, this is perhaps the biggest stumbling block.
To be qualified, your business operations must be hampered by public health orders that restrict your ability to operate. In other words, state or municipal obligations linked to COVID-19 must have compelled your business to close or reduce capacity. Alternatively, if your company's revenue fell by at least 20% in the first quarter of 2019 compared to the same period the previous year, you may be eligible.
This is a substantial improvement over the original CARES Act, which called for a 50% reduction in revenue.
Last word on eligibility: For 2020, there was a 100-employee criterion that was significant in terms of the credit's qualifying salaries. This requirement has been raised to 500 employees for the year 2021. If your company employs more than 100 people, be sure to include your Congress-critter on your holiday card list for 2021.
There are also unique requirements for Charlotte enterprises that don't open until 2020, seasonal employers, tax-exempt non-profit organisations, and the application of sick and family leave credits.
If you have any of these unique circumstances, we must speak with you straight away to ensure that you receive the full benefit from this tax credit.
So, if you'd like to examine your 2020 quarterly payroll tax filings, or if you know another business owner who would benefit from updating those reports, let's set up a meeting:
https://calendly.com/saragonzalez
We’re here for you.
Warmly,
Sara Gonzalez
