IRS Guide Explained: The Employee Retention Credit

employee retention credit
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99.9% of businesses in the US qualify as small businesses. These businesses employ almost half of the private workforce. Yet, small businesses have been affected the most by the pandemic. 

Almost two years in, many still continue to struggle. 

That’s why former President Donald Trump signed the CARES Act into law on March 27, 2020. The CARES act includes the employee retention credit (ERC).

The ERC is a form of economic relief to help businesses throughout the pandemic. It’s a refundable tax credit against certain employment taxes to help keep employees on payroll.

Keep reading to learn more about the ERC and see if your business qualifies.

The Employee Retention Credit Explained

Lawmakers designed the ERC to give qualified employers access to the credit by reducing employment tax deposits they usually have to make. The credit equals up to 50% of qualified wages on wages paid between March 12, 2020, and January 1, 2021. 

The ERC covers qualified wages up to $10,000 per employee for all calendar quarters. This includes allocable qualified health plan expenses. 

What does this mean? Businesses can claim $5,000 in tax credits per employee for these dates.

Employee Retention Tax Credit Updates

President Biden extended the ERC in 2021 under the Consolidated Appropriations Act. (CAA). The extension covers January 1, 2021, to June 30, 2021, or the first two quarters of 2021.

Employers can claim a credit of up to 70% of qualified wages paid. The $10,000 credit per employee also changed from the calendar year to per quarter. 

The CAA also allows businesses who received a Paycheck Protection Program (PPP) loan from March 13, 2020, to December 31, 2020, to possibly qualify for the ERC. If businesses didn’t pay wages with their PPP loan, they can apply for the ERC.

The law also considers group healthcare expenses as qualified wages if no other wagers were paid to the employee.

The American Rescue Plan Act of 2021 extended the ERC again until January 1, 2022. 

However, the Infrastructure Investment and Jobs Act eliminated the credit for the fourth quarter of 2021. Thus, retroactively ending ERC on September 30, 2021. 

This means employers can claim up to $7,000 per employee for the first three quarters of 2021. It totals $21,000. 

Additionally, under the Employee Retention Tax Credit is the Recovery Startup Businesses program. This program covers businesses started after February 15, 2020. These businesses can still receive tax credits through the end of 2021. 

The ERC offers qualified startup businesses a credit of up to $50,000 for the third and fourth quarters of 2021. 

Qualified Wages: Employee Retention Credit Eligibility

Qualified wages are wages and compensation employers paid to employees during the specific periods of:

  • March 12, 2020, to January 1, 2021
  • January 1, 2021, to June 30, 2021

Typically, it includes wages that are subject to FICA taxes. Remember, businesses that paid wages using a PPP loan will find these wages ineligible.

As mentioned, it also includes health plan expenses associated with these wages. 

The IRS has several ways of calculating qualified health expenses. They usually include the employer and employee pretax portion. 

Full-Time Employees

Another element that defines qualified wages is the number of full-time equivalent (FTE) employees businesses had in 2019. FTE employees are those who:

  • In any calendar month in 2019, worked at least 30 hours per week
  • In any calendar month in 2019, worked at least 130 hours in a month 

The cares retention credit has a specific way of calculating FTE employees. Therefore, it is not the same as the PPP forgiveness report. 

Under the CARES act, employers with fewer than 100 FTE employees in 2019 could claim the ERC on all wages during the qualifying period.

The CAA increased this number to 500 FTE employees. These businesses can claim the ERC for 2021 on wages paid during working and non-working periods. 

Businesses with more than 500 FTE employees in 2019 can claim the credit only for wages paid to employees while employees weren’t working. 

Who Qualifies for the Employee Retention Tax Credit?

Most employers qualify for the employee retention tax credit following the passing of the American Rescue Plan Act. In addition, as mentioned, the CAA extended the qualifications to businesses that took out a loan under PPP. 

There are two main factors for employers who want to use the ERC. 

The first applies to businesses ordered to fully or partially shut down during the calendar quarter to which they want to apply. The credit only applies to the portion of the quarter the business was suspended. 

Businesses whose gross receipts fell below 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021) also qualify. 

Startup businesses under the Recovery Startup Business program must have had average annual gross receipts of under $1mn.

How To Apply For the Employee Retention Credit

There is no employee retention credit application. However, employers can claim the credit on their federal employment tax returns. This usually means claiming the credits on Form 941.

This is the Employer’s Quarterly Federal Tax Return form. Employers can amend these forms if they find out later that they qualify for the tax credit. This is excellent news for businesses. 

Some businesses can also claim the tax credit on Form 944. This is the Employer’s Annual Federal Tax Return for Agricultural Employees. 

Form 7200 is available for businesses whose federal employment taxes didn’t cover the payments. This is the Advance Payment of Employer Credits Due to COVID-19 form.

Businesses formed after December 31, 2020, cannot file Form 7200.

Understanding the Employee Retention Credit

Definition and Purpose: Start by defining the Employee Retention Credit as a tax incentive implemented by the IRS to encourage eligible businesses to retain their employees during challenging economic times, such as the COVID-19 pandemic. Emphasize that the credit aims to support businesses by offsetting a portion of the qualified wages paid to employees.
Credit Amount: Explain that the ERC is a refundable tax credit. Outline the percentage used to calculate the credit, which is generally 70% of the qualified wages paid to eligible employees. Elaborate on the maximum credit amount per employee and the overall maximum credit amount per eligible employer.
Eligible Employers: Specify the types of businesses that can qualify for the ERC. Mention that eligible employers include those who experienced either a full or partial suspension of operations due to government orders or those who experienced a significant decline in gross receipts compared to a specific period.
Qualified Wages: Define what constitutes qualified wages for the ERC. Explain that qualified wages generally include wages paid to eligible employees during the designated periods, including certain health plan expenses. Mention any limitations or exclusions, such as wages claimed under other relief programs.
Employee Eligibility: Address the eligibility criteria for employees to be considered for the ERC. Emphasize that eligible employees must meet certain criteria, such as not being related to the business owner and not being paid for more than a specified number of hours during the designated period.
Claiming the Credit: Provide an overview of the process for claiming the ERC. Mention that eligible employers can claim the credit on their employment tax returns, typically using Form 941. Encourage readers to consult with a tax professional or refer to IRS publications for detailed instructions on claiming the credit accurately.

Get the Pandemic Relief You Need

The employee retention credit offers significant relief to small businesses across the country. But, with extensions and changing regulations, it can be challenging to know which companies and wages qualify. 

If you still have questions about how to get the employee retention credit for your business, contact us at ERC Today. We offer expert services and 100% IRS compliance to get your business the funds it’s entitled to.

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