The COVID-19 pandemic created significant financial and operational challenges for businesses. The combination of restrictive government orders and fears about virus transmission resulted in an adverse financial effect on families and businesses. In fact, at the height of the pandemic, the state’s unemployment rate reached a record 12.9%. While every business was impacted differently, there are certain industries, such as construction, which were especially hard hit. Not only were projects delayed and canceled, but it was common for workers to miss work due to illness which created additional costs for management. The unfortunate reality is that many contractors incurred significant losses and have still not bridged the financial gap. For those looking to recover, the Employee Retention Tax Credit (ERC) provides an important chance to do so. This federal payroll tax credit allows eligible employers to receive a tax credit for certain wages paid during the pandemic. To help clients, prospects, and others, Calvetti Ferguson has provided a summary of the key details below.
2021 Employee Retention Credit
The ERC was originally implemented as part of the CARES Act in March 2020. However, it has been extended and modified several times to increase the available value and saving opportunities. Most recently, the American Rescue Plan Act outlined changes effective for the 3rd and 4th quarters of 2021. It is important to note previous regulations will need to be followed when retroactively claiming the credit.
Under the new guidance, a construction contractor may claim the ERC under certain conditions. The company must have experienced a business suspension or shutdown due to a government order, or experienced an 20% decline in gross receipts when compared against the same calendar quarter in 2019. If the business did not exist in 2019, then the same calendar quarter in 2020 should be used.
Maximum Credit Amount
Earlier this year the maximum credit amount was enhanced and permits eligible businesses to claim a credit of $7,000, per employee, per quarter. The change resulted in the opportunity to claim $14,000 per employee for the first half of the year. Recently issued IRS guidance leaves the per employee maximum unchanged through the end of the year. However, since companies can claim the credit for an additional two quarters, the aggregate maximum value is now $28,000 per employee.
The amount of qualified wages which can be claimed depend on whether a business is classified as a small or large employer. Under prior regulations, a small employer was defined as a business with less than 100 employees. Whereas a large employer was a business that had over 100 employees. Under the new guidance, a small employer is defined as a business with less than 500 employees while a larger employer is one with over 500 employees. It is important to note that full-time employees are defined as those that work at least 30 hours per week.
This change is important because the classification determines the amount of wages that can be claimed. Small employers can take a credit for wages paid to both employees rendering services and those not rendering services. A large employer is only able to claim the wages paid to employees providing services. The change is significant because it expands the number of companies that can claim all employee wages paid.
There is an exception to the rule which allows large employers to claim all wages paid. A business that has experienced a 90% decline in gross receipts is eligible to claim all wages paid. Known as severely financially distressed employers, these companies can also use the prior quarter’s gross receipts when determining eligibility.
The Employee Retention Tax Credit provides a compelling savings opportunity that construction companies and contractors can not afford to miss. Now is the time to explore the lucrative ERC. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Calvetti Ferguson can help.