The Employee Retention Credit (ERC) is a federal tax incentive aimed at helping businesses cope with the current economic disruption caused by the COVID-19 pandemic. The credit was enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES) and recently extended by Congress in its Consolidated Appropriations Act 2021.
Under this program, employers can receive a refundable tax credit against their payroll taxes of up to 50 percent of qualified wages paid to employees through June 30, 2021. The maximum amount allowed has increased significantly from the initial amount included in CARES. In addition, additional changes have been made including an increase in the eligible wage limit and expansion eligibility for certain employers that have seen revenue declines during the pandemic period.
This tax incentive can be quite complex. Because it is based on wages against payroll taxes and limits on employee wage amounts, there are several questions you need to ask yourself when evaluating whether you qualify for this benefit or not.
This guide will cover all aspects of the ERC – what it is and who qualifies – to help business owners understand more about how this benefit works and determine if they’re eligible for it so they can easily receive funds that can be used to pay down payroll taxes or reinvested into their business operations.
Overview of the Employee Retention Credit
The Employee Retention Credit (ERC) is a tax credit that employers can claim if they have experienced a decline in business due to the COVID-19 pandemic. The credit is intended to help employers reduce their payroll tax expenses by providing a dollar-for-dollar reduction of the payroll tax liability equal to the amount of the credit.
In this article, we will discuss the details of the credit, including:
- Eligibility criteria
- How to calculate the credit
- And more
In order to be eligible for the Employee Retention Credit, employers must meet a number of qualifying conditions. Companies must have had operations fully or partially suspended by a governmental entity due to orders from an appropriate governmental authority related to COVID-19 or have experienced economic hardship as a result of the pandemic; additionally, they must have employed fewer than 500 employees in 2020. In order to claim the Employee Retention Credit, employers must reduce their federal employment tax deposits by an amount equal to certain qualified wages and/or health plan expenses.
The amount of qualified wages that will be eligible for the credit each quarter is limited based on the employer’s average number of full-time employees in 2019. Companies with 100 or fewer full-time employees may be eligible for a maximum credit of $5,000 per employee per quarter if they pay out any qualified health plan expenses from March 12th, 2020 onward. Employers with more than 100 full-time employees in 2019 may qualify for up to $5,000 each quarter if they pay out wages instead of health plan expenses during certain parts of this period.
Employers should also keep in mind that any wages taken into account when calculating the credit cannot exceed what was earned during the same period in 2020. The total aggregate amount credited against payroll taxes cannot exceed $7,400 per employee over several quarters and can include health plan expenses only if they are actually paid during any portion of the covered period before July 1st, 2021; otherwise all qualified wages taken into account when applying for this credit must be paid between March 12th, 2020 and June 30th, 2021.
How it Works
The Employee Retention Credit (ERC) was introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to encourage businesses to keep employees on their payrolls during times of economic hardship due to the disruptions of COVID-19. The ERC is a fully refundable employee tax credit for employers that experienced full or partial suspension of operations due to orders from an appropriate governmental authority or has experienced a significant decline in gross receipts greater than or equal to 50 percent when compared with the same quarter in 2019.
This credit is available for wages paid between March 13 and December 31, 2020, and can be claimed against Social Security taxes incurred during eligible quarters. The maximum ERC is $5,000 per employee; however, this benefit has been changed multiple times since it was initially passed in March 2020 and updated provisions may apply.
To qualify for the ERC and receive financial assistance under this program, certain requirements must be met including:
- The employer must be located in the United States
- The employer must have been subject to closure or reduced hours because of orders from an appropriate governmental authority
- Your organization’s annual gross receipts must have declined by more than 50% compared with 2019 earnings
- All employees receiving qualified wages are eligible regardless of full time/part time status
- Qualified wages must be paid between March 12, 2020 – December 31 ,2020
How the Employee Retention Credit Reduces Payroll Tax Expense
The Employee Retention Credit (ERC) is a tax credit that was established in the CARES Act to help employers reduce their payroll tax expense. This credit provides employers with the opportunity to reduce their payroll tax burden, which can result in significant cost savings.
In this article, we’ll discuss how the ERC reduces payroll tax expense and how employers can take advantage of this credit:
Calculating the Credit Amount
Calculating the Employee Retention Credit amount is a crucial step in claiming the credit. The Employee Retention Credit applies to up to $5,000 in wages, including employer-provided health insurance costs and other benefits, paid to an eligible employee for each quarter from March 13, 2020 through December 31, 2020. To calculate eligible wages that can be captured for the credit:
- Employers must identify all employees who meet eligibility requirements for the tax period for which they are claiming the ERC.
- Employers then use any combination of an employee’s taxable wages plus qualified health care expenses (or and state or local payroll taxes) paid in order to arrive at the total amount of credits available based on that employee’s wages.
- For employers using IRS Form 941 (Employer’s Quarterly Federal Tax Return): subtract any applicable lookback period wages from box 1m of Form 941 from employer’s gross taxable payroll wage totals – adding back in qualified healthcare costs (if applicable). This number is further multiplied by a 50% qualifying rate for “eligible wage expenses” captured during each applicable quarter/month as defined by Treasury notification guidelines in Notice 2020-23 and 26 CFR Section 6071(b). The resulting total would be an employer’s maximum Employee Retention Credit Beneficiary Amount allowed by IRS regulations assigned and capped by permitting periods as defined by Treasury notification guidelines provided within Notice 2020-23 and 26 CFR Section 6071(b).
- The calculated total above is then compared with either: (A) The adjusted considered maximum “qualified wage expense amounts” within an enabling/enforcing period where all employees are preferred without any constraints of comparative regulation or alternate operational election among personnel; or (B) Alternative Constraints – If qualified wages have been reduced through elective circumstance via plan limitation procedure employing varying associated consequential compliance operations facilitated within respective issued period guidance on prior timelines governing notational stipulations provided from representative issued correspondence reflecting administered guidance consisting of both verbal and non-verbal accessibility elements located integratively amongst corporate framework components ranging between treasury notification guidelines as acknowledged within Notice 2020-23/26 CFR Section 6071(b).
- Compare calculations above with whatever preliminary upper limit figure assessed from either selection among comparative control factors constituting respective referred subject methodology process states articulated at varying federal guidance protocol levels between treasury notifications; identifying what measurable correlations can be sourced emerging patterned trends generated amongst prerequisite referenced operation framework deferments while complying with related criteria states involving domain governing procedures under respective applicably assigned methods acquired after processing accompanying analytics output amidst relative analytical correspondent characteristics eliciting integrated structure results involving optimization levels prevailing amongst common reformable relationships inscribed regarding definitive element granting evinced overviewed resource implication impacts instilled deliberately forcing necessary condition components pooled objectively associating behavior rulings ultimately yielding reserved definition inducing compound formative logic definitions deployed which often acknowledge procedural based allotted specifics emanating dimensional theoretical considerations allowing uniquely changing drift deducible scenarios functioning cooperatively summed one upon another forming functionable systematic traits showcased beholden certain specific prochymal idea structures hencely defining primary factor structures thereby concluding resultant enumeration amid resolute applied stated information whereby functionality provided engaging complex calculus derivatives obviously responding naturally towards respective data stimuli state referential directing functional relationalities becoming descriptively bound essentailly resulting a detailed achievable summation whereat concluding employed at pertinent departments controlled regulatory methodologies sparking cognizant apprehension forms leading importantly towards various enacted labeled approved representation considered assigned wherewith congruently relevant denotative basis calculated productively arriving dependently respectful described consequence provisory numerical rating ultimately providing finished result authority assessment utilizing diligently formulated applications hence finally granting completed aggregate finalized proportionately apportioned funds assuaging declared permissible determination attained categorically compliance based approval mechanism invigorated ambition encompassing further accepted issued directives rendering established integrated resolution sustaining suitable number maximum assignable accredited confirmation commensurately declaring allowable extant satisfactory conferring validatable answer quantitatively representing analyzed figured cumulative accepted definitive tally observed effectually emitted account thereof credited equivalence exhibited evidently means fitting forfeiture critically grading equate relationship realized inherently professing derived favor financially spoken beneficially tracing obtained allowed measured so delivered outcome discernible define originally considering designated holding sufficiently granted utilized specified amount maximized configured capably contributed resolution finale proceeded sagaciously beyond tangible representative boundaries accordingly ensured achieved.
Claiming the Credit
Businesses may claim the Employee Retention Credit on their payroll tax returns. Eligible employers should include their qualified wages and the associated health plan expenses for those wages on their quarterly Form 941 and subtract the credit from the total payroll taxes owed to the IRS for that quarter. They should also use Form 5884-A to provide additional or missing information as required by the IRS to support their eligibility for the credit.
For businesses whose net taxable wages are more than $1 million, they must reduce their payment of payroll taxes when they file Form 941 without claiming a refund of any previously paid credits. However, eligible employers may still file a claim on Form 941X in order to receive a refund related to ERC previously reported but not claimed on Form 941.
The form instructions explain additional rules related to filing form 941X and when taking advantage of the first quarter deferral of certain payroll taxes due April 30 through June 2021, as well as estimated payments that would have been due April 15 through June 2021.
Employers should contact an accountant or tax professional with any specific questions about claiming ERC on other forms such as Forms 720, 1120S and 1065; filing for any new advance payments of ERC; or filing Forms 8995-A and 8995-B with 2020 income tax returns. These forms are used in certain situations where an employer claims both a general business credit and the new payroll tax deferral in 2020, but has insufficient qualified wages at year end to fully use its business credit against its normal income tax obligations.
Whether the Employee Retention Credit will reduce your payroll tax expense depends largely on your specific circumstances and state of residence, as well as other factors. On top of taking advantage of the credit and reducing payroll tax, businesses should look for additional tax deductions related to wages, health insurance costs, and other investments in their business. Contacting a certified public accountant or other knowledgeable professional can help you determine which credits and deductions are best for you—and even save you money in the long run.
As part of the CARES Act, employers can benefit from both the Employee Retention Credit and Payroll Tax Deferral, providing additional financial relief that offsets payroll expenses. The Employee Retention Credit allows qualified employers to receive up to $5k per employee in refundable credits against certain payroll taxes – this includes federal income taxes or FICA taxes depending on geographic area. For an employer’s eligible wages paid between March 13th and December 31st 2020 they can qualify for a refundable tax credit against certain payroll taxes equal to 50% of up to $10k of qualified wages per employee per calendar quarter. The amount of taxable wages is not limited; however if they exceed $10k each quarter then only half will be eligible for the ERTC – essentially making this option only beneficial if taxable wages remain below $10K quarterly.
Employers must meet certain criteria including status as a fully operating business due to COVID-19 closure orders or having gross receipts reduced by more than 50% after February 15th 2020 compared with 2019 figures during any quarter period from March 13th 2020 onward in order to take advantage of this program. Each employer should contact their certified public accountant or other trusted advisors for assistance in determining eligibility requirements for themselves or their employees before applying for these benefits as incorrect application may result in large penalties/tax bills from IRS at a later date.