Congress has revised the employee retention credit to allow taxpayers that took PPP loans (Payroll Protection Program Loans) to claim the credit. Previously, taking a PPP loan meant that the credit was not available so very few taxpayers took advantage of it.  This change was made retroactive to the beginning of 2020, so you can go back and claim credits for last year even if you took PPP money (but not on the same expenses as explained below).   They also eased the requirements to qualify and increased the maximum credit for wages paid between January 1, 2021 and June 30, 2021.   These changes could create a substantial benefit for many businesses.  The rules are different for 2020 vs. 2021 as summarized below.

2020

In order to qualify you must show that there was a gross revenue decline for any quarter of 2020 of at least 50% as compared to the same quarter of 2019.  You can then take the credit for that quarter and future quarters until the end of the quarter where your revenue was no more than 80% of the comparable quarter of 2019. You can also qualify for the credit if you paid employees while you were shut down or partially shutdown under a government order even if you can’t show the revenue decline.  If you have over 100 employees, then you can only claim the credit for employees there were not working while receiving pay; if you were 100 or under this rule does not apply.

The 2020 tax credit is equal to 50% of the first $10,000 of each employee’s wages paid, so a max of $5,000 per employee. This retroactive credit is claimed on your payroll tax filing, form 941 for the 4^th quarter (even if claiming it for prior quarters).   Note – if you obtained a PPP loan, you cannot count the same wages toward PPP loan forgiveness that you use for the credit.

2021

The credit is available for the first and second quarter of 2021.  In order to qualify, you must show that there was a gross revenue decline for any quarter of 2021 of at least 20% as compared to the same quarter of 2019; there is also a safe harbor to use the prior quarter’s gross receipts to determine eligibility.

The 2021 tax credit is equal to 70% of the first $10,000 of employee’s wages paid per quarter, so a max of $7,000 per employee, per quarter.  Note – if you obtained a PPP loan, you cannot count the same wages toward PPP loan forgiveness that you use for the credit.   If you have over 500 employees, then you can only claim the credit for employees there were not working while receiving pay.  This credit will be claimed on your future form 941’s for 2021.

This is a very brief overview as there are many complexities to claiming these credits so please let us know if we can provide any assistance.