The Employee Retention Credit (or ERC for short) was introduced by the CARES Act in an effort to incentivize business owners to keep their employees on the payroll — or even to hire new people. In a nutshell, the ERC is a tax credit against the employer’s share of Social Security tax. What makes the ERC very attractive for small business owners is that it’s refundable. In other words, if the calculated amount of credit exceeds the amount of tax, it is possible to get the excess credit paid out to them.
Naturally, business owners have been keen to better understand (and benefit) from this opportunity, especially given the financial hardship they have endured during the pandemic.
This article is important for those who want to maximize their Employee Retention Credit this year, especially in light of the recent guidance issued by the IRS to clarify and address some of the finer points of the original language. So, read on for a brief overview of the Employee Retention Credit, as well as three strategies to help you get the most benefit from it when thinking about your 2021 taxes.
For the purposes of this article, we will assume a small business, defined as a business with fewer than 100 employees.
Employee Retention Credit 101: Refresher
Employee Retention Credit is applied on a per-employee basis. For example, if you have five employees, you can claim the ERC for up to five people.
At the time it was introduced, the credit was equal to 50% of the wages paid to each employee, up to a maximum of $10,000 of wages per employee. For small businesses, all wages up to the $10,000 limit per employee are eligible to be applied toward the credit.
For 2021, employers can take a 70% credit up to $10,000 of an employee’s qualifying wages per quarter. That means that for the purposes of 2021, the maximum credit amount per employee per qualifying quarter is $7,000.
Another important aside: The wages that have been claimed for PPP loan forgiveness cannot be used to qualify for ERC. In other words, no double-dipping!
So, what can business owners do to maximize their pass at the ERC this year?
Qualify for more quarters’ worth of the credit
Employers can get the most benefit (in terms of dollars) by qualifying for more quarters’ worth of credit. So, the best place to start is understanding what makes a “qualified” quarter.
A “qualified” quarter is any quarter where your business was affected by the shutdown, and where your year-over-year quarterly revenues dropped below 50%. So, interestingly enough, a business that saw sales drop dramatically for a quarter just to recover may qualify for more relief than another business that wasn’t in quite as dire straits but suffered for several quarters. Each qualified quarter qualifies the next quarter, and so on until receipts recover up to 80% of the corresponding “benchmark” quarter.
Does it matter whether the drop was due to a direct and full shutdown? Not necessarily. A partial shutdown or suspension will still qualify, as long as it was under a government order. In other words, an “essential” business that wasn’t ever fully shut down can qualify if it was “partially suspended,” or impacted in relationship to pre-COVID operations.
Add health care costs (and tips)
In order to maximize the benefit, you want to add health care costs and tips to wages in the calculation.
Here is why: Under the current IRS rules, health benefits (and even healthcare premiums paid by the employee) can count as qualifying wages. One important caveat is that the employee must use pre-tax wages to cover the premium, and the amounts must be treated as non-taxable to the employee.
Use aggregation rules
Aggregation rules allow you to combine more than one business in your eligibility calculation. This could be beneficial in a situation where one business was severely affected by the shutdown, while the other was not greatly affected.
A simple example: If you own a gym (a business greatly affected by the shutdown) and a health food store that sells supplements and groceries (a business deemed essential and thus not greatly affected by the shutdown), you can combine them for the purposes of the Employee Retention Credit. That way, the severe decline in the gym numbers can potentially help the grocery store qualify, as well.
Strategies to maximize your Employee Retention Credit
The Employee Retention Credit is a valuable piece of tax planning strategy for business owners.
Start by mapping out the qualifying quarters in 2021.
Add health care costs and tips to wages when calculating ERC.
Finally, if you own multiple businesses, consider leaning into the aggregation rules. This is especially critical in a situation where one business was greatly affected, while another business was deemed essential and suffered less of an impact.
If you have any questions about getting the most out of your Employee Retention Credit, reach out to our team at TreMonte Financial. We specialize in helping business owners build a tax plan that maximizes their profits. After all, you have a better use for that money than the IRS does!