How the Employee Retention Credit Can Help Your Business in 2020
Overview of Employee Retention Credit
The Employee Retention Credit (ERC) was established as part of the CARES Act to help employers retain their employees during the COVID-19 pandemic. This credit helps employers who are experiencing economic hardship or shutdown due to the pandemic to continue paying employees and helps to offset some of the employer’s payroll costs.
In this article, we’ll provide an overview of the ERC including:
- Eligibility requirements
- Credit amounts
- Other important details you should know.
Overview of the employee retention credit program
The employee retention credit (ERC) was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide employers with a refundable tax credit for wages paid to employees. The ERC is designed to help offset the costs of keeping employees on payroll during the COVID-19 pandemic. Eligible employers may qualify for a 50% tax credit for employee wages up to $5,000 per employee for 2020. In order for an employer to qualify for the ERC program, they must have experienced either:
- Full or partial suspension of business operations due to COVID-19 government orders; or
- Gross receipts decline by more than 50% compared with same quarter in 2019.
To be eligible, employers must have fewer than 500 full-time employees (and part-time equivalent employees). Self employed individuals are also eligible under this program. For those employers that may qualify and wish to claim the credit, it is important that they keep accurate records of eligible wages paid and claimed throughout their reporting period in order to ensure proper eligibility and maximize their overall benefit from the program.
In 2021, eligible employers can also qualify for a new extension of the ERC that includes an increase in the amount of wages covered by the credit up to 80%, with no maximum limit per employee if certain criteria are met. Additionally eligible entities can apply credits against employer Social Security taxes which can further reduce their taxable income and overall financial burden associated with sustaining businesses during this difficult time.
The Coronavirus Aid, Relief, and Economic Security Act, commonly known as the CARES Act, includes an Employee Retention Credit (ERC) for businesses affected by the coronavirus. This credit helps employers by offsetting as much as 50 to 70 percent of an employer's payroll costs from March 2020 – December 2021. The retention credit will be available for around 9 million businesses, including those with fewer than 500 employees experiencing a full or partial business suspension due to government closure orders.
To be eligible for the retention credit in 2020, a business must have operations that were fully or partially suspended due to government entity orders related to COVID-19 or experienced a significant decline in gross receipts. A “significant decline” is defined as a decrease of more than 50 percent when compared against the same quarter in 2019. Businesses that fail to meet these criteria are not eligible for the retention credit in 2020 and must wait until 2021 to apply through their quarterly taxes. In 2021, eligibility will be based on employment levels and gross receipts, which will require tracking both all year long.
In January 2021, additional requirements were added that require businesses to pay employees at least $10,000 over 6 months (January-June) if claiming the ERC for wages paid between January 1 and June 30 of 2021. Some other eligibility requirements include:
- The employer must pay wages that are subject to Social Security and Medicare payroll taxes.
- The corporation may not take deductions for wages on its income taxes; only qualified wages taken into account on Form 941 can be used for ERC purposes (at least $10k per employee must remain during 6 months period).
- Employees working remotely from outside United States are not qualifying employees unless they meet certain exceptions set forth by IRS regulations.
How to Calculate the Credit
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, businesses can take advantage of the employee retention credit to reduce their payroll taxes. The employee retention credit is designed to encourage businesses to keep employees on their payrolls despite the disruption of the COVID-19 pandemic.
Calculating the employee retention credit can be complex, so let's discuss the details and how to calculate the credit.
Calculating the amount of the credit
The employee retention credit (ERC) is a refundable tax credit that helps employers who have been affected by the coronavirus (COVID-19) pandemic to retain workers and cover wages.
To compute the amount of the ERC, you need to start with your qualified wages for each quarter of 2020. Qualified wages are defined as the sum of:
- payroll costs paid for eligible employee's wages
- health care costs incurred by providing group health care coverage through a group health plan including coverage related to COVID-19 testing
For businesses with more than 100 full-time employees, qualified wages only include those amounts paid when they were not providing services due to business interruption or decline in gross receipts.
The next step is to subtract any other refundable credits such as amounts taken for sick and family leave under the Families First Coronavirus Response Act (FFCRA). Once you have determined your net qualified wages, take 50 percent of those amounts. That 50 percent is the maximum amount you can use in calculating your employee retention credit for each quarter for 2020.
The total employee retention credit available is capped at $5,000 per eligible employee for all quarters combined in 2020.
Maximum credit amount
The employee retention credit is a refundable tax credit for employers who continued to pay their employees through 2020 despite closures and slowdown caused by the COVID-19 pandemic. This credit is for employers who retained their workforce during this difficult time, although many businesses were forced to lay off or furlough employees due to Covid-19’s dramatic impact on the country and the world. The employee retention credit is an incentive to encourage employers to maintain their payrolls and keep people employed.
The employee retention credit provides a tax incentive of up to $5,000 per employee with a maximum of $10,000 total per employer in 2020. This total is calculated by first determining eligible wages that are paid before July 1, 2021, up to a maximum of $10,000 per employee or $5,000 per quarter across all eligible quarters (second quarter of 2020 through the fourth quarter of 2020).
- If you have had eligible wages equal or greater than $10,000 for most of your employees in any one quarter then you are not allowed any additional credits in other quarters except if otherwise specified from IRS guidelines and regulations.
- The tax credit can be claimed as always on your federal employment tax return (Form 941), and it can offset both regular income tax liability but also certain depreciable taxable income items as well as certain employment tax liabilities like overpayments from prior years.
How to Claim the Credit
The Employee Retention Credit, established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, is a refundable tax credit that offsets a portion of the wages and health insurance costs that eligible employers pay to employees who are affected by the COVID-19 pandemic.
In this article, we will discuss how to claim the Employee Retention Credit.
Filing Form 941
Employers who have qualified for the employee retention credit follow a specific process in order to claim the credit. First, employers must file Form 941, Employer’s Quarterly Federal Tax Return. This form can be found on the IRS website and must be filled out completely and accurately in order for employers to receive any credits. It is recommended that employers who are eligible for the credit consult with an accountant or tax professional before submitting their form.
On Form 941, employers should include all wages paid from March 13th through December 31st and indicate any additional amounts that qualify for the amount of employees affected by COVID-19-related business closures or government social distancing requirements (e.g., temporary layoffs). Furthermore, it is important to indicate whether or not this calculation also applies to benefits such as paid leave, qualified health plan expenses, etc.
After completing Form 941 and filing along with any required documentation listed on the form (such as payroll records that support wages paid) employers should wait to receive their refund if one is due or will receive their confirmation of a reduced balance due if they owe less than originally thought after claiming the employee retention credit. Additionally, those who wish to amend their Form 941 and claim retroactive credits should also follow this same process; however, be sure to read through all applicable forms carefully first as amended Forms 941 may have different sets of rules or supplemental documents so as mentioned previously consulting a tax professional may be advised in these cases.
Filing Form 944
Employers who are eligible to claim the Employee Retention Credit must file Form 944, Employer's ANNUAL Federal Tax Return. The form must be used to report on your total annual wages and taxes for a particular calendar year. The form is used to report Medicare and Social Security taxes, federal income tax withholding, FUTA tax withheld and other details pertaining to the employment of their employees.
When filing Form 944, employers are required to enter the activities related to employee wages like pay period and pay date when each paycheck was issued, along with total wages paid during that period. Additionally, they ought to indicate the amount of retirement contributions made by their employer and the amount of overtime or premium wage payments made during that time frame.
It is important for employers to accurately calculate their total amount wage payments made in order for them to correctly determine if they have met the requirements for claiming this credit. Moreover, it will help them maximize savings where applicable – be sure you are taking advantage of all deductions that may apply. After thorough calculations have been completed accurately and all information entered onto Form 944 was submitted – employers may get refunds within 2-4 weeks after submitting this form . After successful completion of filing Form 944 – you can start claiming your CREDIT!
The federal government has taken steps to provide employers with assistance through the Employee Retention Credit Program. This program offers employers a refundable business tax credit, based on eligible wages they pay to employees after March 12, 2020 and before December 31, 2020.
To help employers understand their rights and obligations under the Employee Retention Credit Program, there are additional resources they can turn to:
If you are considering claiming the employee retention credit, the IRS's website offers many resources to answer your questions. Below is a list of frequently asked questions that may help guide you, as well as links to additional resources:
- Is an employee eligible if they decline to work due to fears of the coronavirus?
- Can I claim a credit if my business was required to shut down due 2020 disasters?
- Are employers who receive Paycheck Protection Program (PPP) loans still eligible for the credit?
- How do I claim the Employee Retention Credit on my business taxes?
- What kind of wages can I use for this credit?
- Does the 50% limit apply to health plan expenses only?
The IRS has compiled several pages of materials dedicated solely to helping employers better understand and utilize the Employee Retention Credit, with comprehensive guidance documents such as:
- Form 941 instructions; specifically referencing lines 10 and 24g “Employer Retention Credit”.
- Publication 5136, Employee Retention Credit for Employers Affected by COVID-19
- Employee Retention FAQs
Additionally, here are more reliable sources where you can find detailed information about this important topic:
- Department of Treasury – Coronavirus Tax Relief
- Small Business Office – Guide To Applying For The Employee Retention Tax In 2020
IRS Publication 15-A
The Internal Revenue Service (IRS) Publication 15-A, Employer's Supplemental Tax Guide, provides detailed information on the employee retention credit (ERC) from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
It covers the following topics:
- Definition of a qualified employee for purposes of ERC;
- Eligible wages that are taken into account when calculating ERC;
- Retention period during which eligible wages must be paid in order to receive refundable credits;
- Limitation on discounting of relevant wages;
- Proration rules to calculate ERC; and
- Carryback or carryover of refunds received.
In addition to providing guidance on ERC eligibility, Publication 15-A outlines other tax compliance topics including: payroll taxes, deducting taxes from employee compensation, filing payroll tax returns, fringe benefits reporting requirements and more. The publication also includes Frequently Asked Questions (FAQs) about the ERC and other helpful resources.
Frequently Asked Questions
Q: What is the employee retention credit for 2020?
A: The employee retention credit is a refundable tax credit for employers equal to 50% of qualified wages (up to $10,000 in wages per employee) that are paid from March 13, 2020 through December 31, 2020.
Q: Who is eligible for the employee retention credit for 2020?
A: The employee retention credit is available to employers whose businesses were fully or partially suspended due to a governmental order due to COVID-19 or whose gross receipts declined by more than 50% compared to the same quarter in the prior year.
Q: How do I claim the employee retention credit for 2020?
A: Employers can claim the employee retention credit for 2020 on their quarterly employment tax returns, Form 941. The credit is also claimed on the employer’s annual income tax return.