By Steven Kutsuflakis CPA
What You Need to Know About the Employee Retention Credit
The Employee Retention Credit (“ERC”) was created to help employers recover from the government mandated COVID-19 related shutdowns by allowing employers that pay qualified wages including health plan expenses to receive a refundable tax credit of up to $5,000 per employee in 2020 and $28,000 per employee in 2021.
The ERC was originally enacted under the March 2020 Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) and has undergone a series of revisions with the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“the Relief Act”) enacted in December 2020 and later the American Rescue Plan Act of 2021 (“the American Rescue Plan Act”) enacted in March 2021.
Who is Eligible?
Employers, including tax-exempt entities, are eligible for the credit if they were carrying on a trade or business during the calendar quarter for which the credit is determined and experience either:
- the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- a significant decline in gross receipts when compared to the same quarters in 2019. For the 2021 quarters, a significant decline is defined as less than 80% of gross receipts for the same quarter in 2019. For the 2020 quarters, a significant decline is defined as less than 80% of gross receipts for the same quarter in 2019.
The ERC is not available to the Government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing (governmental entity) with some exceptions.
The definition of qualified wages depends on number of employees during 2019.
If an employer averaged more than 100 full-time employees during 2019 (2020 small eligible employers), qualified wages are generally those wages, including certain health care costs, paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
If an employer averaged 100 or fewer full-time employees during 2019 (2020 large eligible employers), qualified wages are those wages, including health care costs, paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services.
The Relief Act provides that large eligible employers are eligible employers for which the average number of full-time employees during 2019 was greater than 500 (2021 large eligible employees). The Relief Act provides that small eligible employers are eligible employers for which the average number of full-time employees during 2019 was not greater than 500 (2021 small eligible employers).
Exclusion from Qualified Wages
An employer that is eligible for the ERC can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP). The eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.
Claiming the Credit
As mentioned earlier the ERC is up to $5,000 per employee in 2020 (50% of qualified wages up to $10,000 per employee for all quarters) and $28,000 per employee in 2021 (70% of qualified wages up to $10,000 per employee for each quarter in 2021).
There are various rules related to claiming the ERC, including circumstances under which an eligible employer may request an advance payment of the ERC.
Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.
To claim the ERC, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers. The credit is taken against the employer’s share of Social Security tax, but the excess is refundable under normal procedures.
In anticipation of claiming the credit, employers can retain a corresponding amount of the employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes for all employees, up to the amount of the credit, without penalty, considering any reduction for deposits in anticipation of the paid sick and family leave credit.
Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
Guidance for claiming the ERC can be found at www.irs.gov under IRS Notices 2021-20 and 2021-23.
If you have questions or would like additional assistance in determining whether this funding is available to your Organization, please contact Steven N. Kutsuflakis, CPA, Partner at firstname.lastname@example.org.
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