The Employee Retention Credit is a refundable tax credit available to employers who have experienced either a partial or full suspension of operations or an economic hardship caused by the COVID-19 Pandemic. The program is designed to help businesses retain and pay their employees, and the credit can be used to cover up to 50% of wages paid to employees (up to $5,000).
This overview will discuss the program in more detail, including eligibility requirements, and how to claim the credit:
Definition of the Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable tax credit for employers subject to closure or experiencing significant declines in gross receipts as a result of the COVID-19 pandemic. Eligible employers can receive a credit equal to 50% of qualified wages up to $10,000 per employee.
Qualified wages are defined as wages paid after March 12, 2020 and before January 1, 2021 to employees when they are not providing services due to either the full or partial closure of the business due to a COVID-19 related shutdown order or gross receipts decline. Qualified wages do not include health plan expenses that are allocated from payroll taxes or amounts taken into account for any other credits taken on dollar for dollar basis such as the Sick and Family Leave credits.
Employers who had an average number of full-time employees in 2019 of more than 100 are eligible for the ERC only with respect to wages paid for time employees are not providing services due to either their partial or full suspension of operations by order of governmental authority limiting commerce, travel, or group meetings due to COVID-19 in 2020. Employers with an average number of full-time employees in 2019 fewer than 100 may be eligible regardless if their business has been suspended due to COVID-19 regulations in 2020. A special rule applies only if the employer experienced shut down orders lasting 30 days or more during any drawn out period that extends beyond December 31, 2020. Additionally certain non profits also qualify on certain conditions set forth by Treasury & IRS guidance.
How the Employee Retention Credit works
Small business owners who have been affected by the COVID-19 pandemic may be eligible for the Employee Retention Credit, which was created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The credit is designed to provide employers with a refundable tax credit for a portion of wages paid to their employees between March 13, 2020 and until December 31, 2020.
The Employee Retention Credit is available for employers who have:
- Been operating since at least January 1, 2020;
- Experienced a full or partial suspension of operations due to governmental orders related to the COVID-19 health emergency; or
- Experienced a significant decline in gross receipts compared to the same quarter from 2019.
Eligible employers can claim the credit on their quarterly employment tax returns (Form 941). The employee retention credit is applicable for wages paid after March 12 and before January 1, 2021. The eligible amount is based on wages paid up to $10,000 per employee in any given quarter. The amount credited per employee per quarter is equal to 50 percent of wages earned up to $10,000 within that quarter. This means that each eligible employer can claim up to $5,000 per employee as an Employer Retention Credit in any given quarter. Employers can also elect to pass it through their payroll processor by using Form 7200. Additionally, if there are excess credits over taxes due during each quarterly filing period, individual employers may submit an application through the IRS portal for an advance refund within two weeks via Form 7200A.
With the Employee Retention Credit (ERC), qualifying employers can take a credit against certain employment taxes equal to 50 percent of the qualified wages they pay their employees. Employers must meet certain criteria in order to be eligible for the credit. In this article, we’ll look at the criteria you must meet in order to qualify for the ERC:
Qualifying employers that can claim the Employee Retention Credit (ERC) are businesses, tax-exempt organizations, or governmental entities that experienced either a full or partial suspension of operations due to orders from an appropriate governmental authority due to COVID-19 related reasons OR a significant decline in gross receipts.
- For businesses with more than 100 full-time employees:
- In order for employers to qualify for the ERC based on a full or partial suspension of operations, their facility must have been fully or partially suspended by an appropriate governmental authority due to COVID-19 related reasons during any calendar quarter in 2020 and the employer must have made reasonable efforts to restore operations.
- For businesses with 100 or fewer full-time employees:
- In order for employers with 100 or fewer full time employees (including non profits and governmental entities) to qualify for the ERC based on a significant decline in gross receipts their gross receipts must be less than 50 percent of gross receipts during the same quarter in 2019. This comparison is done over the period of 3 consecutive calendar quarters (e.g. 1st Quarter 2020 compared with 1st Quarter 2019, 2nd Quarter 2020 compared with 2nd Quarter 2019, etc).
The Employee Retention Credit (ERC) is a refundable tax credit available to employers affected by the COVID-19 pandemic, helping those businesses keep their employees on their payrolls during this challenging time. The credit is available for up to 50% of qualified wages.
In order to qualify for the ERC, a business must meet certain criteria. First, the business must have had its operations fully or partially suspended during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19. Second, an employer whose gross receipts declined by more than 50 percent when compared to the same quarter in the prior year also qualifies for the ERC.
Additionally, only certain types of employees within a business may qualify for this credit. Qualifying employees are those whose principal place of employment is either within one of the U.S States or U.S possessions with respect to services rendered at least partially within such jurisdiction, as well as those who perform service with respect to trade or business based outside of the United States if specific conditions are met.
- These conditions include having either been assigned any one foreign office that was used during 2020 or having made applicable services between 1/1/20 and 3/31/20 at two different foreign offices during 2020 that were both used at any point after 12/31/19.
- The employee whose wages are taken into account must generally be employed on a full-time basis with respect to applicants other than self-employed individuals and sole proprietorships or seasonal employers meeting specified requirements throughout such quarter and must work at least forty hours per week if paid annually; however, under special circumstances part-time employees may qualify as well.
In order to qualify for the Employee Retention Credit, businesses must meet certain criteria. These criteria include having a qualified wage paid or incurred during the covered period, which is either March 12, 2020 through December 31, 2020 or January 1, 2021 through June 30, 2021 depending on the business’ circumstances.
Qualified wages are wages paid by an eligible employer to an eligible employee after either March 12, 2020 and before January 1, 2021; or from January 1 2021 and before July 1 2021. Qualified wages are generally defined as those paid for hours that an employee would ordinarily be required to work but could not due to COVID-19 related circumstances (e.g., furloughs/reduced hours). The most qualified wages that can be taken into account in any one quarter for each employee is $10,000.
Additionally, businesses need to consider the health care expenses portion of their qualified wages under the Emergency Paid Sick Leave Act themselves separate from those claimed under the FFCRA credit. Qualified health care expenses are payments made by an employers providing group health plan coverage to its employees in respect of such employees’ health care needs primarily caused by COVID-19 so long as they are incurred or paid during a period beginning on December 31st 2019 and ending on July 1st 2021 However they cannot be claimed twice with both credits being taken into account; only one (the most beneficial) can be used.
How to Claim the Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable tax credit that helps businesses keep and retain their employees during the pandemic. If your business qualifies for the ERC, you may be able to take advantage of this credit to help offset the costs of employee wages.
However, there are conditions for qualification and steps to claiming the ERC. Let’s look at the details.
Filing the Form 941
To claim the Employee Retention Credit, employers will need to file a Form 941 with their federal payroll taxes. Since the ERC is claimed as part of your quarterly payroll tax return (Form 941), it’s important to ensure accuracy on this form.
Form 941 includes the following sections:
- Section 1: Gross Wages, Tips and Other Compensation
- Section 2A: Taxable Social Security Wages and Medicare Wages
- Section 2B: Total Employees with Respect to Wages Paid
- Schedule B: Allocated Tip Income (if applicable)
- Schedule R: Credits for Sick Leave and Family Leave Made Available by Small Employers Pursuant to Division E of Public Law 116–127
- Schedule A: Qualified Retirement Plan and Health Insurance Costs of Current Employees
- Schedule J: Statement of Owner’s Shares of Income, Credits, Deductions, etc.
- Form ERC Part 1: Summary of Employee Retention Credit Computation
- Form ERC Part II: Detailed Breakdown of Employee Retention Credit
When filing your Form 941, take special care that all data points are accurate so that you can properly claim the maximum amount allowed in employee retention credit for each quarter you are eligible for it. Additionally, employers must also complete Form 8849 in order to opt out from carrying back any excess employee retention credits from 2020 or 2021 quarters for up to 20 years.
Claiming the Credit on Your Tax Return
The Employee Retention Credit is claimed on IRS Form 941, Employer’s Quarterly Federal Tax Return. The credit should be computed for each quarter separately and the employer will report this calculation to the IRS on their quarterly payroll tax filing (Form 941). Eligible employers can make a request for advance payment of the credit by submitting the applicable form or contacting their payroll provider to reclaim any excess taxes withheld from employee wages as part of their advance payment within seven business days from the publication date of these final regulations.
If you are eligible for a refund due to an excess tax withholding related to your prior Employment Retention Credit, you can claim it by filing Form 941-X with the IRS. This form must be filed adjuncth with Form 941, Employer’s Quarterly Federal Tax Return. You may also file a revised Form 944, Employer’s Annual Federal Income Tax Return.
When claiming and computing your Employee Retention Credit against your 2020 taxable income, it is important that you maintain accurate records verifying your qualification including:
- documentation of your gross receipts and wages paid;
- records that reflect payments of cash tips; and
- documentation that proves amounts with respect to family leave wages and qualified health plan expenses were paid or incurred during the required period(s).
Tips for Maximizing the Employee Retention Credit
The Employee Retention Credit is a great way for employers to receive financial assistance for retaining their employees during the COVID-19 pandemic. As an employer, you may be eligible for the credit if your business has been affected by COVID-19. There are certain criteria and qualifications for it, so it’s important to understand how to make the most of it.
Here are some tips for maximizing the Employee Retention Credit:
Calculate the Credit in Advance
Calculating the amount of employee retention credit (ERC) you can receive in advance is a great way to plan appropriately. To qualify for the credit, employers must have experienced some form of economic hardship due to COVID-19. Businesses must have either:
- Suspended operations because orders from governmental entities due to COVID-19-related reasons; or
- Been required by governments to reduce hours or services for employees in order to limit further spreading of the disease.
If your business meets one of these two criteria, you should calculate what your potential tax savings will be by employing the following steps:
- Identify all eligible wages and health plan expenses that are paid between March 13, 2020, and Dec 31, 2020;
- Calculate a ratio between wages and health care expenses that were paid between March 13, 2020 and Dec 31, 2020;
- Determine the maximum potential amount available for ERC by applying that ratio from Step 2 to your total amount of taxable wages paid before Jan 1 2021;
- Determine if your qualified wages fall under a “large employer” designation (500 or more full time employees); and
- Use IRS Form 7200 to calculate actual claims through April 15 2021 after payment has been made. Once the filing deadline passes submit an amended return if necessary with IRS Form 941X if an adjustment is found necessary after April 15 2021 calendar year end taxes are filed on Form 941-X are due June 30 2021.
Monitor Your Eligibility
Owners need to stay on top of their eligibility status. Depending on the size of your firm and its viability, you may have to go through several verification steps before you can receive the credit.
Monitoring your eligibility status is important for two reasons. Firstly, economic conditions can change quickly and impacts such as decreased gross receipts can cause an employer that’s otherwise eligible for the Employee Retention Credit to become ineligible very quickly. This means that any business considering whether it qualifies for the program needs to monitor their gross receipts every quarter to ensure they continue claiming this tax credit legitimately.
Secondly, employers should monitor their overall size and accounts receivable balances to determine whether they qualify as a relevant small or large employer when claiming the Employee Retention Credit. Any changes in workforce size or cash flow position could have a major impact on the business’s eligibility status. Employers may also need to review and adjust their payroll system periodically in order to ensure they are properly tracking staff hours worked throughout the quarter in order to receive this tax credit that is based on wages paid during each period of time involved in a relevant payroll cycle.
Claim the Credit in the Right Tax Year
The Employee Retention Credit is a powerful tool for employers to potentially recoup significant amounts of wages paid between March 13, 2020, and January 1, 2021. One of the important things to consider when utilizing this credit is the timing you claim it on your taxes.
For taxpayers who file Form 941 on a quarterly basis, you can claim the credit against wages paid during the applicable quarter before computing your employment tax liability. If you’re able to reduce your total employment tax obligation to zero because of the ERC, then you can also request a refund of any excess amount that wasn’t needed for payroll liabilities.
For those who opted for advance payments toward their ERC via Forms 7200 or 7202, it’s advised that you wait until after filing returns in order to review and adjust any payments made in error as well as ensure timely filing of Forms 941 along with other filing requirements. It’s best practice to quantify all eligible wages used against the ERC before filing returns in order minimize mistakes and maximize your benefit.
If claiming after-the-fact in the form of refundable credits during filing Form 941 has been too challenging or time-consuming for some businesses, they may wish to look into:
- Claiming Preliminary and Final Payments under Form 7200 or 7202 where advance credits are available against eligible wages paid which could significantly reduce cash flow concerns while businesses navigate resources towards reopening and sustaining operations.
The Department of Treasury continuously updates guidance around Employee Retention Credit so staying informed is key when maximizing qualification eligibility.