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The COVID-19 pandemic created new and unexpected challenges for businesses in Los Angeles and Orange County. While every business was impacted differently, the construction industry was hit hard with project delays and cancellations. At the same time, those permitted to remain on the job site often became infected, resulting in contractors paying wages for those who could not work. The result was several bad months in a row resulting in even more distress. For those looking to recover these losses, the good news is that the Employee Retention Tax Credit (ERC) offers the opportunity to do so. This federal tax credit allows qualifying businesses to claim a credit for wages paid to employees during the pandemic. What makes it better is the credit can be claimed for qualifying wages paid in 2020 and 2021. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
What is the Employee Retention Credit?
It is a refundable federal payroll tax credit allowing a qualifying business to claim a credit for eligible wages paid. If the amount of the credit exceeds the payroll taxes due for the quarter, then the difference is refunded. Although the ERC was originally introduced in 2020, contractors can still take advantage through the end of 2021.
Maximum Credit Amount
In 2021, the maximum credit amount is equal to 70% of qualified wages, including qualifying health expenses, paid to an employee in any calendar quarter. This means an eligible employer can claim a $7,000 credit per employee, up to $28,000 per employee for the year. For 2020, the maximum credit amount is capped at $5,000 per employee for the year.
The eligibility rules vary between 2021 and 2020, and therefore some of the details are different. For the second, third, and fourth quarters of 2020, an employer is eligible if operations were fully or partially suspended due to a government order or if gross receipts for any quarter were less than 50% of the gross receipts for the same quarter in 2019.
For any 2021 calendar quarter, an employer is eligible if operations were fully/partially suspended due to a government order, or if the gross receipts for a quarter are less than 80% of the gross receipts for the same period in 2019, or the immediately preceding quarter.
When determining the number of qualified wages that can be claimed, it is necessary first to determine whether a business is classified as a small or large employer. For 2020, an eligible employer is a small employer if there are 100, or fewer, average full-time employees. In 2021, the threshold is increased to 500, or fewer, average full-time employees.
Now some may be wondering why this distinction is made. The reason is the wages that can be claimed by a small employer can include those paid to employees providing services and those who are not. Unfortunately, large employers can only claim wages paid to employees that are providing services. While it may seem like a small distinction, it can significantly impact the amount of available credit.
For example, a construction contractor classified as a small employer can claim the wages paid to 20 full-time employees regardless of whether they provided services. In 2021, this means the contractor can claim a credit worth ($7,000 x 20 employees) $140,000. A contractor classified as a large employer can claim the wages paid to the 10 full-time employees providing services only. The calculation may not include the wages paid to those not working. This means they would only be able to claim a ($7,000 x 10) $70,000 credit per quarter.
Claiming the Credit
Since the ERC is a quarterly payroll credit, a contractor does not need to wait until the end of the year to receive the benefit. Instead, the credit amount is reported on the corresponding IRS Form 941 – Employer’s Quarterly Tax Return. An employer simply documents the amount of the credit and reduces the quarterly payroll tax deposit by that amount. It is important to note that small employers can request an advance on the credit under certain circumstances.
The Employer Retention Credit represents a significant savings opportunity that Los Angeles and Orange County contractors cannot afford to miss. If you have questions about the information outlined above or need assistance with a tax or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9893 or click here to contact us. We look forward to speaking with you soon.