Claiming the ERC Credit on Form 941/943 Filing
The Consolidated Appropriations Act (CAA) of 2021 has greatly expanded the Employee Retention Credit (ERC), which was originally signed into law with the CARES Act in 2020. As a result of this, it is important not to rush filing your Form 941 or 943 to be sure you are claiming your allowable ERC properly.
With the expansion of the ERC to include taxpayers that received a PPP loan, more taxpayers are eligible to claim the credit for both 2020 and 2021 on Form 941 and 943. The qualifications for the credit are different for both 2020 and 2021.
For 2020, taxpayers need to show a reduction in revenues of at least 50% compared to the same quarter in 2019. The allowable credit is equal to 50% of qualifying wages up to $10,000, resulting in a maximum credit of $5,000 per employee for the year. Qualifying wages include cash compensation paid to employees from March 12, 2020 to December 31, 2020. Wages paid to related parties and commodity wages do not qualify for the ERC. Wages used in calculating the ERC must be reduced by wages used to qualify for PPP loan forgiveness.
Since the ERC is now allowed for taxpayers that received a PPP loan, those that filed 941 forms for the first three quarters of 2020 may have been eligible to claim the ERC on those returns. Rather than filing an amended return to claim the credit on those returns, the credit for the entire year can be claimed on the fourth quarter Form 941.
The ERC credit is available for the first and second quarters of 2021. The difference for the 2021credit is that the 50% revenue reduction is reduced to a 20% reduction when comparing the gross revenue to the same quarter in 2019. In addition, the credit allowed is increased to 70% of qualifying wages up to $10,000 per quarter, resulting in a maximum credit allowed of $14,000 per employee for the year.
With the expansion of the Employee Retention Credit into 2021, taxpayers may want to consider planning opportunities to defer income later into 2021 to maximize their ERC allowed for the period of January 1, 2021 to June 30, 2021. Reach out to your KTLLP advisor to discuss these opportunities.