COVID-19 brought about worldwide devastation and our small business communities were in the direct line of impact. Throttled by business shutdowns and stay-at-home orders, many businesses were left struggling to make ends meet. With doors closed and employees sent home, employers found themselves forced to exhaust cash flow and take out PPP loans just to keep their businesses afloat. Now, almost two years later, a lot of small businesses still feel the ripple effects that COVID continues to leave behind. As businesses work to rebuild, relief like the Employee Retention Credit 2021 becomes all the more important.
If your business and employees meet certain qualifications for 2021, the Employee Retention Credit can provide you with the crucial support you need. To ensure you get the most out of your credit, this post breaks down the Employee Retention Credit 2021, showing how to claim and maximize your credit.
Note: This blog is focused on the Employee Retention Credit for 2021. If you’re interested in the Employee Retention Credit for 2020, you can learn more here: Does My Business Qualify for the Employee Retention Credit?
Employee Retention Credit 2021 vs. 2020
The government introduced the Employee Retention Credit to reward employers that retained their staff during a time when COVID-related layoffs were at an all-time high. This credit was originally designed as a part of the Coronavirus Aid, Relief, and Economic Security (or CARES) Act, which also provided unemployment assistance, student loan relief, and other economic safeguards through the first wave of the COVID-19 pandemic.
The 2020 Employee Retention Credit reimbursed employers 50% of their first $10,000 worth of qualified wages paid to each employee, with a maximum credit of $5,000 per employee.
For 2020, qualified employers include those that either (1) suffered a 50% decline in gross receipts in 2020 when compared to the same quarter in 2019 OR (2) their business was shut down fully or partially by government order AND they paid qualified wages between March 12 and December 31 of 2020. Once a business qualified, it would then continue to receive the credit for each following quarter throughout 2020 until the gross receipts recovered to 80%.
However, with the prolonged effects of the pandemic continuing to threaten employee retention, the government realized that a 2020 credit alone would not be enough. So, in December of 2020, the Consolidated Appropriates Act (CAA) not only allowed for the use of credits in conjunction with PPP, but also expanded these credits into the next year, allowing for the Employee Retention Credit of 2021.
Exploring The Employee Retention Credit 2021
The Employee Retention Credit 2021 covers the first three quarters of the year, from January 1, 2021 to September 30, 2021 (or up to December 31, 2021 for Recovery Startup Businesses). Not only is this credit easier to qualify for, but it also offers more relief than the 2020 version. In fact, the credit reimburses up to 70% of the first $10,000 worth of qualified wages paid to each employee per quarter. This means that employers could potentially receive $7,000 per employee for both quarters in 2021 – that’s potentially $21,000 per employee!
What’s more, to meet qualification requirements, your business only needs to prove a 20% or more decline in gross receipts when comparing the quarter of 2021 to the respective quarter of 2019.
As a payroll provider, we’ve helped hundreds of small businesses navigate the Employee Retention Credit since the beginning of the coronavirus pandemic. As a result, we’ve learned several tips and tricks for maximizing your credit and making the process as painless as possible. We’ll go over what you need to know below, but if you have any questions along the way, we encourage you to reach out to our team any time.
What Are Gross Receipts?
To qualify for the Employee Retention Credit 2021, you first need to compare your gross receipts each quarter in 2019 with each quarter in 2021. If any of the first three quarters in 2021 experienced a 20% decline, then you are eligible for that quarter.
To determine your gross receipts in 2021 vs. 2019, you need to consider the following factors:
- Total sales (net of returns and allowances)
- All amounts received for services
- Income from investments
- Income from incidental or outside sources
For businesses that use QuickBooks, here’s how to determine if your decrease in receipts makes your business eligible for ERC:
- Click Reports
- Choose Company and Financial
- Run the Profit & Loss Standard
- Set the dates to January 1, 2019 – March 31, 2019
- Find the Total Income in your gross receipts at the top of the report
- Repeat for the next three years to see your receipts by quarter
Alternatively, if an employer with up to 500 employees does not satisfy the gross receipt requirement but was partially shut down due to a government order during January 2021, it would also be eligible for the Employee Retention Credit. However, eligibility would only cover the qualified wages paid to employees during the period the business was partially shut down.
What Are Qualified Wages?
Qualified wages are any wages paid to employees – including health plan expenses - during the quarter of gross receipt decline. Eligible employers with up to 500 employees will be able to claim all wages paid to employees during an eligible quarter. Keep in mind that family members and those who own 50% or more of the business do not qualify as employees.
It’s also important to note that ERC can be claimed in conjunction with a Paycheck Protection Program loan or the Families First Coronavirus Response Act (FFRCA) paid leave credits. However, you cannot double-dip and claim both credits on the same employee wages.
If you need any more help determining your gross receipts or qualified wages, we recommend working with a CPA who can do the calculations for you. If you have not worked with a CPA and need a referral just let us know. Our team would be happy to connect you to one of our CPA partners in your area!
How To Claim Your Credits
Once you decide if you qualify for the Employee Retention Credit 2021, you need to know how to claim your credits. No application is required for this process – instead, employers will need to claim their credits using an adjusted quarterly tax return called Form 941-X.
The easiest way to file Form 941-X is to work with your payroll provider. After you’ve established your eligibility period, you’ll need to request your payroll reports, ensuring that non-qualified wages are removed. When your credit amount is established and documented, your payroll company can file the 941-X for each quarter. After the IRS processes these forms, (currently around 6 months) you’ll receive your refund checks directly in the mail!
It's important to let your tax preparer know once you have filed the 941-X so they can plan accordingly.
Maximizing Your Employee Retention Credit 2021
The Employee Retention Credit 2021 was extended to help small businesses and workers during tough economic times. Leveraging the credit to its fullest potential is prudent for every small business owner who qualifies. Understanding what wages qualify, how to apply, and the additional benefits you can take advantage of will set you up for success to claim your Employee Retention Credit.
At ConnectPay, we’ll be filing a 941-X on behalf of our clients who were on our service during the affected quarters. If you’re not a current client but still need assistance navigating ERC, our door is always open.