For those who want to save on taxes and retain employees, there’s a new tax credit that can help you achieve your goals. It’s called the Employee Retention Credit.
This tax credit was previously under the radar, but has recently become a lucrative opportunity for business owners. Like many other tax credits, the Employee Retention Credit didn’t get to be a powerhouse overnight, but the benefits it provides make it worth exploring.
Paycheck Protection Program (PPP) eligibility requirements
- The Paycheck Protection Program (PPP) is a government-sponsored program that offers loans to eligible businesses in times of economic distress. The program, which was established in January 2002, has disbursed over $500 billion in loans since its inception
Since then, PPP eligibility requirements have changed several times. As a result, many small businesses are having trouble understanding how to qualify for the program and apply for forgiveness.
One of the most common complaints against the Paycheck Protection Program is that the program is too generous, with larger companies getting more money than small businesses. To counter that, the Biden administration is introducing a two-week period in which only small businesses with 20 or fewer employees can apply for loans. It is also proposing to set aside $1 billion for businesses in low-income areas.
The maximum PPP loan amount is two and a half times the average monthly payroll cost of a business in 2019 and 2020. However, some industries, including the food and accommodation sectors, may qualify for a higher calculation, 3.5 times average monthly payroll costs. Before applying, consult with an accountant or financial advisor to determine your eligibility.
IRS guidance on claiming the tax credit
The IRS recently released guidance on claiming employee retention tax credit versus PPP loans. The guidance outlines how to qualify for the employee retention credit and clarifies what is not considered taxable income.
As of today, employees who are working for a COVID-approved employer are eligible for the tax credit. However, there is a catch: these benefits cannot be included in the same quarter of gross receipts. The guidance is aimed at preventing employers from double counting.
To claim ERC, businesses must first determine whether their total wages exceed the total amount of the PPP. The ERC applies to both W2 employees and 1099 employees, and is a refundable tax credit. The ERC is calculated on wages incurred by the company, including health insurance payments. Small employers must calculate the ERC on all wages received by each employee, including the wages of non-exempt employees.
Limitations of the credit
The Employee Retention Credit is a tax credit for businesses that keep a significant portion of their employees. This credit allows businesses to deduct 50% of an eligible employee’s wages. This tax credit has certain limitations, however. Employers that have more than one hundred full-time employees are not allowed to claim this credit.
When calculating the credit, it’s important to remember that if employees are deemed not eligible to receive the Work Opportunity Tax Credit, the employee retention credit can’t be claimed.
Until recently, a business could not receive both a PPP loan and an employee retention credit. However, Congress has changed this rule. Employers can now receive both types of tax credits, as long as they have a 50% decrease in their 2020 calendar quarter gross receipts. It is important to remember that the decrease does not have to be caused by a pandemic.