The COVID Relief stimulus package signed at the end of 2020 brings good news to businesses looking for additional financial support as they continue to experience interruptions by the pandemic. Recent legislative changes now expand the eligibility for the employee retention tax credit (ERC) and introduce another round of Paycheck Protection Program loans.
Qualified Wages Percentage Increase
The new law will now apply to more businesses who paid wages during 2020 and are paying wages in 2021. Under the prior law, if you received a Paycheck Protection Program (PPP) loan, you were not allowed to take the ERC as well, but this new legislation retroactively permits an employer with a PPP loan to apply for the ERC if the company qualifies for the use of the credit. The ERC is generally provided as a payroll tax refund from the IRS. The credit is up to $19,000 per employee, broken down to $5,000 maximum for all of 2020 and $7,000 for each of the first two quarters in 2021 (maximum of $14,000).
If you are an owner of an S corp, you may be able to claim the credit for your own wages. Here’s how: If you hold 50% or less ownership in a corporation and are unrelated to the other owners, you may claim the credit against your own wages. You cannot claim the ERC if you own more than 50% of the corporation, either directly or by attribution if the owners are related parties.
Keep in mind, there is no double dipping. Meaning, a business cannot use the same qualified wages for both the PPP and the ERC. You may, however, have additional wages that could qualify for a credit for 2020 if the wages you paid to employees in 2020 exceed your PPP forgiveness amount. Employers can qualify for the ERC for wages paid to retained employees through June 20, 2021.
Relaxed Gross Receipts Test
The CARES Act created certain criteria for businesses to qualify for the ERC:
- you were fully or partially affected by a government shutdown order, or
- your gross receipts for quarters two, three, or four of 2020 were 50% or less than your gross receipts in the corresponding quarter of 2019
The new stimulus relief bill lowered the gross receipts eligibility threshold from 50% to 20% in 2021. Now, businesses only have to prove a 20% decline in gross receipts compared to the same quarter in 2019 to fulfill eligibility.
Definition of a Small Employer Expanded
Another piece of good news is the threshold for a small employer was raised from 100 full-time equivalent (FTE) employees in 2020 to 500 FTE employees in 2021. This is significant because large employers are required to calculate qualified wages based on employees who “are not providing services,” versus small employers who can include qualified wages of all employees in their calculations. As you can see, this is a major door-opener for many more businesses to qualify for a larger wage pool under the new definition of a small employer.
Second Draw PPP Loans
Don’t forget, you have until March 31, 2021 to apply for a Second Draw PPP loan with the Small Business Administration. You may qualify for a loan if you:
- previously received a First Draw PPP Loan and have used (or will use) all of it
- employ 300 or less employees (or meets an alternative size standard)
- can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
What to do Next
We’re still waiting on further guidance from the IRS in some areas of the new legislation, but please don’t hesitate to contact us if you have questions on how to calculate this credit for your business. Call us at (781) 247-5569 or email me at stu@erocktax.com to learn more about the ERC and PPP loans.