As we quickly approach the 2021 tax filing season, it is always beneficial to go back and review what law changes have occurred over the last year to ensure that all tax saving opportunities are being taken advantage of. One of these items is the Employee Retention Credit (ERC). Throughout the first three quarters of 2021, this refundable tax credit provided significant cash savings in the form of a payroll tax credit for qualified contractors.
What is the Employee Retention Credit?
The ERC was initially introduced within the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020, and further expanded in subsequent bills, as an incentive to encourage employers to retain their employees as COVID-19 placed a heightened uncertainty on the economy and many contractors. For qualified contractors, the computed ERC for each eligible quarter is reported as a credit on the contractor’s Form 941 for that quarter. This results in a dollar-for-dollar reduction to the contractor’s payroll tax liability, with any excess fully refundable.
For tax year 2021, the ERC is available for the first three payroll quarters, or through September 30th, 2021. Any wages paid after September 30th, 2021, are considered ineligible for the ERC as a result of recent legislation.
How to compute the Employee Retention Credit for 2021?
- Determine whether your construction company is eligible. Does your business meet one of the following two conditions?
- Did your business have a 20 percent reduction in gross receipts in any of the first three quarters in 2021 compared to the same quarter in 2019? An alternate lookback methodology is available, which allows a business to use the previous quarter’s receipts for calculation of the 20 percent reduction.
- Was your business impacted by any state or local mandated partial or full shutdown orders at any time in 2021? This is a more subjective test in which a variety of facts and circumstances taken together may be important to consider. Documentation of the analysis carried out in reaching a favorable conclusion is important.
- Determine the qualified wages and health insurance expenses for each of the first three qualified quarters of 2021.
- Calculate the tax credit by taking 70 percent of qualifying wages, up to a maximum of $10,000 qualified wages per employee. For 2021, the maximum ERC is $7,000 per employee per quarter.
Is the Employee Retention Credit taxable on your 2021 income tax return?
The ERC credit is subject to income tax on your 2021 tax return. For example, if your business claims $500,000 of Employee Retention Credit for Q1 2021, then it must reduce the wages deducted on its 2021 income tax return by $500,000. This increase to taxable income is required to be recognized on your company’s tax return in the year in which the qualified wages were paid or incurred. This is extremely important to consider when evaluating whether to go back and amend any of the first three quarters of 2021 payroll tax filings to claim the ERC.
For more information on how to determine eligibility, the significance of the credit, and how Kreischer Miller can assist you through the ERC process, please refer to this article on our website or contact your Kreischer Miller tax professional.
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