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Overview of Employee Retention Credit
The Employee Retention Credit (ERC), authorized by the CARES Act, is a refundable tax credit for employers who retain their employees and pay them wages during the 2020 calendar year. The credit is available to eligible employers whose gross receipts have dropped due to the COVID-19 pandemic. It is designed to help employers struggling to retain their employees amid the economic hardships of the pandemic.
Let’s take a deeper look into the specifics of the Employee Retention Credit and how long it is available:
Definition of Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable payroll tax credit designed to help businesses retain their workforce and keep both employees and employers afloat during the COVID-19 pandemic by providing eligible employers with a tax credit of up to up to $5,000 per employee. The ERC applies to wages paid between March 12, 2020, and December 31, 2020.
In order to be eligible for the ERC, an employer must have seen its business operations suspended or partially suspended due to orders from a governmental body related to the COVID-19 pandemic or have experienced at least a 50% decline in revenues attributable to such orders compared with the same quarter in 2019. Employers who meet these criteria can claim the credit each calendar quarter from March 12 until December 31, 2020. In addition, employers whose average number of full-time employees per month in 2021 is lower than their average number of full-time employees per month in 2019 are also eligible for this credit for 2021’s first two quarters.
The amount of the ERC is based on qualified wages that employers pay during each quarter of this period as well as permitted health plan expenses allocable to such wages paid during that same quarter. Qualified wages are generally those wages paid during any period between March 12 and June 30, or October 1 and December 31 of 2020. The amount that can be claimed as a refundable tax credit is equal to 50% of qualified wage costs up to $10,000 per employee (if the employer took out loans through Paycheck Protection Program (PPP), only wage cost above PPP loan amounts can count towards ERC; however there will be no double counting if P3 loan funds are used).
Eligibility Requirements
The Employee Retention Credit (ERC) is a fully refundable federal tax credit available to eligible employers for a portion of wages paid to employees for tax years beginning after December 31, 2020, and before January 1, 2022. Eligible employers must have experienced certain financial hardships, experienced a full or partial suspension of their operations due to government orders related to COVID-19, or had significant revenue losses (more than 50%).
In order to qualify for the ERC, an employer must meet all of the following criteria:
- Maintain operations during the period covered by the credit
- Have either fully or partially suspended business operations due to an order from an appropriate governmental authority limiting commerce, travel and group meetings due to COVID-19; or experienced a reduction in gross receipts greater than 50% when compared to the same calendar quarter in 2019
- Not be receiving aid through the Paycheck Protection Program
- Not receive more than $10 million in aggregate aid from any other programs designed specifically for relief from consequences caused by COVID-19
The ERC is limited only by the amount of eligible wages paid. Eligible wages are limited to $10,000 per employee in 2021 ($5,000 in 2020). In addition, employers are not allowed to claim ERCs with respect to the same employee twice under two separate credits—the FFCRA tax credits and/or payroll tax credits.
Length of the Employee Retention Credit
The Employee Retention Credit can be a valuable tax incentive to employers who are struggling financially due to the COVID-19 pandemic. This credit enables employers to receive a tax credit for up to 70% of an eligible employee’s wages paid between 3/13/2020 and 12/31/2020. But knowing how long the credit is available is important for employers so they can maximize their savings.
Let’s take a look at the length of the Employee Retention Credit:
Credit Period
The Employee Retention Credit (ERC) covers wages paid between March 13, 2020 and December 31, 2020. It is a refundable credit applied against the 6.2% payroll tax imposed on employers, which is matched by the employer.
Eligible employers are allowed to claim a fully refundable credit equal to 50 percent of qualified wages paid up to $10,000 in wages per employee for all calendar quarters of the credit period. The maximum potential amount of this credit is thus $5,000 per employee for the 12-month period (or $7,000 for a small business that has been in operation for less than one year).
The ERC can be claimed on the quarterly Form 941 filed with the IRS or on an amended return after December 31 if it was inadvertently not claimed when filing Form 941. Claiming this credit requires employers to make an irrevocable election not to claim the work opportunity tax credit with respect to any of its employees who qualifies for ERC wages during this same period.
Extension of the Credit
The American Rescue Plan Act of 2021 extended the Employee Retention Credit under the Coronavirus Aid, Relief and Economic Security (CARES) Act through December 31, 2021.
Under the Act, an employer is eligible to claim the Employee Retention Tax Credit if they are either:
- Fully or partially suspended operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19; OR
- Experiencing a significant decline in gross receipts relative to the prior year.
The credit rate of 70% of qualified wages paid per employee is available up to a maximum of $7,000 in total qualified wages per individual employee for any covered period from March 13th, 2020 thru December 31st, 2021. A quarter can be considered a “covered period” for this calculation if one chooses. The maximum amount available for credit per employee has been raised from the $10K cap that was in place for 2020. The credit rate dropped slightly from 80% through all four quarters ending December 31st of 2020 to 70% for 2021 but still increases with each successive quarter.
For employers that file their taxes electronically on a monthly basis as opposed to quarterly basis can receive their tax credits as early as 30 days after filing but should expect at least 90 days after filing before receiving their refund.
How to Claim the Credit
The Employee Retention Credit (ERC) is available to employers in the US who have been affected by the Coronavirus pandemic. The credit applies for wages paid in 2020 and 2021. Employers who qualify can get a refundable payroll tax credit of up to $7,000 per employee.
So if you qualify, how do you claim the credit? Let’s look at the details:
Documentation Requirements
When claiming a credit, it is important to have proper and accurate documentation. Documentation provides evidence that you paid or received qualified wages or property, that your employees qualify for the credit, and that you complied with requirements established by the state and federal laws.
Required documents may vary based on your business type, but could include:
- Payroll records showing wages paid and taxes withheld
- Receipts or canceled checks verifying purchase of eligible property
- Proof of eligibility to work in the United States (e.g., Form I-9 Employment Eligibility Verification)
- Copy of profits or loss from self-employment (if applying for a self-employment credit)
- Records showing the completion of state approved training for employees who apply for a training credit
It is important to keep track of all documents related to the credit being claimed, even after the application is approved. The IRS has up to 3 years to audit claims made on a return, so be sure to retain all relevant records as long as possible in case of an audit.
Forms and Filing Deadlines
If your business experiences a significant decline in gross receipts due to the COVID-19 pandemic and you are eligible for the Employee Retention Credit, you will need to file various forms with the IRS. To determine which forms are required and when they must be filed, it is important to understand what type of entity is claiming the credit.
- Sole Proprietorships or Single Member LLCs: If your business is sole proprietorship (owned solely by one individual) or an LLC owned by only one member, most likely you will claim the credit on Form 1040 Schedule C (Profit or Loss from Business).
- C Corporations: If your business has several owners or has elected C Corporation status for taxes, generally you will use Form 941 (Employer’s Quarterly Federal Tax Return).
- Partnerships: Generally, a partnership claiming the credit files Form 1065 (U.S. Return of Partnership Income), even if it would otherwise file aForm 1040 Schedule C. For either of these filing guidelines, complete Line 13f of Form 941/Form 1040 instead to claim the Employee Retention Credit.
If you are eligible and choose to apply this credit, then employers must ensure they file within 21 days after their period closes. For example, if an employer’s pay period covered January 1 -31 2021 , then employers have until February 21st 2021 (the 21st day after period closes) to submit their tax return in order to receive their refund or apply it against amounts owed for other taxes paid throughout that same period.
It is recommended that employers keep detailed records regarding any claimed credits and any liabilities surrounding such credits so as not to face audits from IRS as errors can occur throughout this process given its complexity, especially since rules may vary for different entities listed above.
Other Considerations
The Employee Retention Credit can provide valuable relief to an employer, but there are considerations to be taken when utilizing this credit. Among the considerations to be aware of are the parameters of the credit, the eligibility of the employer, and the expiration of the credit. Let’s look at each of these considerations in detail:
- Parameters of the Credit
- Eligibility of the Employer
- Expiration of the Credit
Tax Implications
The Employee Retention Credit is not a refundable credit, so you can only use it to reduce your federal income tax liability. This means that if your maximum credit amount is more than the total taxes you owe, you won’t be able to use the remaining balance of the credit. This can be both a benefit and a detriment; while it prevents taxpayers from receiving refunds, it could also help them avoid any additional tax liabilities on income already earned.
Additionally, some states have adopted their own version of the Employee Retention Credit and businesses may qualify for credits in these states, as well as federal credits. As with all tax credits, businesses must comply with all state requirements before claiming the Employee Retention Credit. Before filing taxes or taking advantage of any available tax credits, taxpayers are encouraged to consult a qualified tax professional for advice about their individual circumstances and local laws.
Interaction with Other Credits
When purchasing coffee, it is important to consider the interaction between other credits and the roast. Roasts that are darker will pair nicely with milk and sugar—whether regular or alternative—and absorb other flavors well. Lighter roasts may be overwhelmed or overpowered by additives or milk. Milk tends to brighten the flavor of medium and dark roasts, while lighter options are generally better enjoyed with minimal additions so their delicate nuances can be savored.
Additionally, geographic differences in production processes must also be taken into account when making a selection. While specialty coffee shops often attempt to capture the taste of an area’s coffee preferences, various production methods such as wet (pulped) or dry (natural) processed beans will impact Flavor notes and overall body of a cup of coffee as well.
Impact on Payroll Taxes
The Employee Retention Credit affects payroll taxes in a few different ways, depending on the size of the employer and the total amount received through the credit. The most significant way that an employer’s payroll taxes are impacted is in their FICA (Federal Insurance Contributions Act) contributions.
For employers who received less than $5,000 through the ERC, they will receive a reduction in their FICA contributions up to 95 percent. This is done by providing a credit against employer-side Social Security taxes equal to 70% of qualified wages (up to $10,000 per employee) for each quarter if the total amount of wages does not exceed $10,000 for any one employee. For employers who received more than $5,000 from the ERC, they will receive reduced FICA contributions equaling 100% of their qualified wages up to $10,000 per quarter for each employee as long as total compensation does not exceed $10,000 for any one employee.
In addition to reducing FICA contributions from qualifying wages paid from March 28th through December 31st 2020 or January 1st through June 30th 2021 (depending on which quarter you claim the credits), employers can also carryover unused credits into future quarters related to those same dates. Any credits remaining at year-end are then eligible to be used against existing employment tax liabilities on 2020 Forms 941 filing at year end.