How the Employee Retention Credit Can Help Your Business
Overview of Employee Retention Credit
The employee retention credit (ERC) was created as part of the CARES Act, and is designed to help employers keep their employees on payroll during the pandemic. The ERC provides a payroll tax credit of up to $5,000 per employee for qualified wages paid from March 13, 2020, through December 31, 2020. The credit is refundable and is applied directly to employers’ quarterly payroll tax liabilities.
In this section, we'll provide an overview of the employee retention credit and explain how it works.
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is an incentive provided by the US government in response to the COVID-19 pandemic for employers to keep employees on their payroll. The credit was made available after the passage of the CARES Act in March 2020 and is available for wages paid from March 12, 2020, through December 31, 2020.
The ERC is a refundable credit based on qualified wages paid to employees of an eligible employer. An “eligible employer” under this program is a U.S. business that has partially or fully suspended its operations due to orders from an appropriate governmental authority limiting commerce as a result of COVID-19 or that experiences a significant decline in gross receipts. Eligible employers are entitled to receive up 50% of qualified wages per employee up to $10,000 per calendar quarter with respect to wages paid between March 12, 2020 and December 31, 2020.
Eligible employers who have 100 or fewer full time employees may be eligible for additional credits in certain circumstances if they pay a portion of their employee’s health care costs while they are not providing services due to operations being fully or partially suspended as a result of COVID-19 related governmental orders or if they make significant changes to their workforce as a result of reduced business operations caused by the same orders.
Employers will be required to provide detailed records about their employees and related payments including form 1099s for calculations when filing for the credit with smaller businesses being able complete claims more quickly due IRS streamlined filing options and specialty software solutions which are becoming increasingly popular for those programs among many others associated with ERC eligibility requirements and filing options.
Who is eligible for the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable tax credit for employers affected by the COVID-19 pandemic. It is available for certain businesses that either fully or partially suspended operation due to governmental orders related to COVID-19, or that experienced a significant decline in gross receipts.
The eligibility criteria for the ERC are divided into three categories: Eligibility Criteria Based on Closure or Significant Decline, Adjusted Gross Receipt Tests, and Qualified Wages.
Eligibility Criteria Based on Closure or Significant Decline: In order to be eligible for the ERC under this criterion, employers must meet either a requirement that their business was fully or partially suspended due to governmental orders related to COVID-19; OR they must demonstrate that their gross receipts during a calendar quarter in 2020 were less than 50% of the comparable quarter in 2019 AND if their revenue decline continues through 2021, they’re allowed an alternative method of showing revenue decline from 2020 relative to 2019.
Adjusted Gross Receipts Tests: In order to be eligible for the ERC under this criterion, an employer must have gross receipts in any calendar quarter in 2020 that are less than 80% of its gross receipts within the same period before 2020 (or if greater than double from 2019).
Qualified Wages: In order to be eligible for the ERC under this criterion, an employer must pay qualified wages per employee per Quarter. Qualified wages are determined based on average employment at different employee levels (e.g., 10 employees or fewer versus 11 – 100 employees). Effective January 1, 2021 through June 30, 2021 (the extended period), employers can include up to $10K/month/employee as qualified wages per quarter regardless of employee count – but only up until December 31, 2021. Once wage amounts include employer paid health insurance premiums – those wages count towards more than 50% wage base calculations used by Social Security and Medicare.
How much is the Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit for eligible employers that are actively retaining and providing financial support to their employees during the COVID-19 pandemic. The amount of the credit depends on whether the business is fully or partially suspended due to governmental orders or if it has had a significant decline in gross receipts year over year.
For businesses that are fully or partially suspended, the amount of the credit available for each quarter of 2020 is equal to 50% of qualified wages paid (up to $10,000 of wages) per employee (up to $5,000). For businesses that have experienced a significant decline in gross receipts year-over-year, the credit available for 2020 is equal to 70% of qualified wages paid (up to $10,000 per employee) with no limit per employee.
To qualify as qualified wages, certain requirements must be met such as having been paid during a period when they were actively performing services while being employed by you due to either being suspended under relevant COVID-19 order or significantly declining revenues due to reduced business operations in a given quarter.
How to Claim the Employee Retention Credit
The Employee Retention Credit was created by the CARES Act to provide tax incentives to employers for keeping their workforce employed during the COVID-19 pandemic. This credit allows eligible employers to claim a tax credit against certain types of federal payroll taxes they pay.
This section will discuss how to claim this credit and the benefits it provides to employers:
When to claim the Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable tax credit available to employers that retain workers and pay them wages during the coronavirus (COVID-19) pandemic. The credit is designed to help reduce the economic disruption caused by the coronavirus (COVID-19) pandemic and help employers keep their employees on payroll.
When the ERC is available, employers qualify for a refundable tax credit against certain employment taxes equal to 50 percent of employee wages, up to $10,000 per employee for each quarter in 2020. Businesses that receive PPP loans through December 31, 2020 can still claim any eligible Employer Retention Credit as long as they meet all other eligibility requirements and don’t double count wages.
Businesses must make an irrevocable election on their quarterly employment tax return for each quarter to claim the credit. If a business was entitled to claim more than what was allocated in its initial claims filing, then it may refile the claims on its amended return within the same time period.
Generally, taxpayers should request an advance payment of the employer retention credit by filing IRS Form 7200 – Advance Payment of Employer Credits Due To COVID-19 with their income tax returns each quarter they are eligible. Taxpayers who have already filed their taxes but realize they are eligible after filing may also file Form 7200 separately any time before September 30th 2021 to request an advance refund of employer credits due to COVID-19.
How to claim the Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable tax credit that employers can take advantage of to offset certain expenses associated with keeping employees on their payroll. With the enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES) in March 2020, the ERC was expanded to also cover wages paid to certain health care workers employed between January 1, 2021 and June 30, 2021.
The ERC offers qualified employers a tax credit equal to 50% of up to $10,000 in wages paid per employee for each calendar quarter during 2020 and the first two quarters of 2021. Employers with fewer than 500 employees are eligible. Eligible wages include salary, wages, vacation pay and other similar types of compensation.
In order to claim the credit for any 2020 or 2021 calendar quarter:
- Complete Form 941 for each quarter in which it is intended to take advantage of the credit.
- Calculate your Qualified Wages as described in Notice 2021-20 on IRS.gov.
- Claim the ERC on your quarterly Form 941 by completing line 11b or line 12b if filing an electronic version.
- Keep records showing:
- who qualifies;
- when they received their payment;
- what specific services were performed;
- where those services were performed;
- how much was paid;
- when it was paid;
- how it was paid and
- which calendar quarters you are using for determining employee retention credits under Notice 2021-20.
Note: Make sure you keep clear written records in case you're ever audited by the IRS! Additionally, unused ERC amounts are allowed to be carried back one year from 2021 or forward 20 years from 2020 if applicable on your taxes.
Documentation requirements for claiming the Employee Retention Credit
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Employee Retention Credit made available to those employers who were financially impacted by the COVID-19 pandemic. The Employee Retention Credit can provide a refundable tax credit of up to $5,000 for each employee who continues to work during the crisis.
Claiming this credit can be beneficial for employers seeking financial relief due to COVID-19 business losses. To ensure all documents are properly presented when claiming the Employee Retention Credit, employers should provide documents such as:
- A valid W-2 for each eligible employee
- A copy of payroll tax returns for the quarter
- Any supporting documents related to payments or employee benefits
- Documentation that proves eligibility due to business interruptions or anticipated decline from eligible trades or businesses or governmental orders
- Calculations used in determining qualified wages paid
It is vital that employers document all actions taken in order to claim this credit and prove that they are eligible. Employers should also take measures such as tracking accrued vacation and sick days as well as other paid leave that qualify as wages and other waivers extended during this period of time by taking screenshots of waived fees and reviewing company health plan payments policies. By properly documenting these actions on behalf of an employer’s employees, claims submitted with accurate documentation will be approved more quickly in order for them to receive much needed financial assistance.
Tips for Maximizing the Employee Retention Credit
The Employee Retention Credit (ERC) is a tax credit that was put in place in 2020 to help businesses retain and rehire employees who were affected by the Coronavirus (COVID-19) pandemic. The credit is available to employers who experienced a full or partial suspension of their business due to a governmental order or experienced a significant decline in gross receipts.
In this article, we'll go over tips for maximizing the Employee Retention Credit and how to benefit from it:
Calculating the Employee Retention Credit
Calculating the Employee Retention Credit can be complicated since there are multiple key factors to consider and many hours of related paperwork. To maximize the ER credit with maximum accuracy, employers should review and determine:
- Applicable wages paid during the covered period (March 13, 2020 – December 31, 2020).
- The gross wages paid in the previous year (calendar year 2019) during each quarter for which the credit is claimed for comparison.
- The number of full-time employees employed by the employer as of March 31, 2020 and December 31.
- The amount of subsidies received from certain federal programs, such as a Paycheck Protection Program loan or Economic Injury Disaster Loan to help cover employee wages. The ER Credit amount must be reduced by all subsidies received from certain federal programs that are used to cover employee’s wages.
Employers can use the IRS Form 941 for calculating quarterly payroll taxes, but for calculating the ER Credit amounts it is advised to use an employee retention tax calculator that can quickly and accurately determine wage levels eligible for a given quarter or fiscal period. Employers should also keep in mind that if they overstate their wages eligible for a given week or month on their Form 941 they need to redo calculations on Form 5884C – Employee Retention Credit under FICA Taxes Prior To January 1st 2021. Additionally, if an employer looked back at calendar 2019 wages when filing in one quarter, but did not follow those calculations into later quarters or had any other changes in gross taxes or employment status – they may need to refile again at those periods using specific forms related to ER Credit calculations provided by IRS. This will ensure that businesses have maximized their ER credit eligible amounts for each quarter/fiscal period and have accurate records of data on hand should auditing take place.
Claiming the Employee Retention Credit for multiple employees
The Employee Retention Credit is a refundable tax credit available to eligible employers to help offset the costs of retaining employees in businesses that were either fully or partially suspended due to the economic hardships related to coronavirus or can demonstrate a significant decline in gross receipts.
In order for an employer to be eligible for the credit, they must have 100 or fewer full-time employees in 2019. Businesses that employ multiple individuals may claim the Employee Retention Credit (ERC) for all of their eligible employees, up to the maximum allowable amount.
The criteria to be eligible for this credit are as follows:
- The business must have experience a significant decline in gross receipts greater than 50%, compared to the same quarter from the prior year.
- The business must not have had full or partial suspension of operation due to COVID-19 compliance orders from a governmental entity.
- This credit is only available against qualified wages paid after March 12th, 2020 and before January 1st, 2021. This includes all wages, both federal and state withholding taxes, employee's portion of Social Security and Medicare taxes, and qualified health plan expenses allocated on Form 941 Line 10 (or Form 943 Line 10).
Businesses should take steps such as compiling payroll records demonstrating calculation of retained wages and allocation between full-time equivalents, using Form 941 quarterly filing procedure or applicable methods depending on applicable payroll service providers; collecting applicable documentation attesting economic hardship; calculating tax credits; filing with IRS prior to February 15th 2021 if considerations are provided over 2020. Taking these steps will enable business owners and employees alike to maximize their employee retention credits when claiming them for multiple employees.
Working with payroll providers to maximize the Employee Retention Credit
Maximizing the Employee Retention Credit (ERC) can be a daunting task for business owners because it relies on complex calculations and adjustments to employment tax returns. Working with knowledgeable payroll providers is an important step to ensure the ERC is claimed correctly.
By working with a payroll provider, you can get expert advice about setting up benefits deductions, pay periods, and wages for employees for both federal and state withholding taxes so that you maximize your ERC. They can also set up direct deposit of ERC refunds into employee accounts as well as other payroll-related measures that could help you save money in the long run.
If you are unsure about how to set up withholding taxes for staff or which pay periods are best suited for your business, then a payroll provider can help guide you through this process. They will consider factors such as whether employees are part-time or full-time workers when providing advice. The provider may also go over the different types of state and federal allowances available such as 401K contributions or dependent care expenses in order to maximize the credit and save money when filing returns.
Moreover, many providers offer additional services such as:
- Tax forms filing
- Labor law compliance consulting
- Worker’s compensation coverage reviews
- Accounting support and more
that can be beneficial in managing your payroll properly so you get the most out of your employee retention credit claim.
The employee retention credit is a tax credit designed to help eligible employers keep their employees during the COVID-19 pandemic. It is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and provides eligible employers who experience financial hardship a credit for up to 50% of wages paid to employees for services performed.
This article will cover the most common questions about the employee retention credit:
Can I claim the Employee Retention Credit for employees who are furloughed?
Yes, employers can claim the Employee Retention Credit for eligible employees who are furloughed or whose hours have been reduced due to the COVID-19 crisis. The credit is available to employers who experience either a full or partial suspension of their business activities due to a governmental order. Employers are also eligible if they experienced a significant decline in gross receipts during a 2020 calendar quarter compared to the same calendar quarter in 2019.
The Employee Retention Credit provides employers with the ability to receive a credit against their payroll taxes for up to 50% of wages given to employees that would have been lost during this period, up to certain limits. The maximum qualified wages per employee are $10,000 for all quarters combined in 2020, and employers can qualify for up to $5,000 per employee for all quarters combined in 2020. It is important that employers understand what qualifies them for this credit and correctly claim it by following the IRS guidelines accordingly.
Can I claim the Employee Retention Credit for employees who are laid off?
The Employee Retention Credit (ERC) is an employee-focused benefit designed to help businesses that were affected by the COVID-19 pandemic. The credit is available to employers whose operations have been partially or fully suspended due to governmental orders related to the COVID-19 pandemic, or that have experienced a significant decline in gross receipts.
Employers may not claim the ERC for any employee who was laid off due to lack of business operations before March 12, 2020, or after December 31, 2020. Furthermore, employers cannot claim the ERC for any employee if they experienced a partial or total unemployment due to governmental orders related to COVID-19 and subsequently received wages from the employer on or after March 12, 2020 and before December 31, 2020.
In order for employers to receive an ERC refundable credit, certain criteria related to wages paid must be met. To be eligible for the credit, employers must pay qualifying wages up until December 31st and those wages must be reported in a timely manner on Form 941 each quarter as well as Form 940 annually. Additional information regarding eligibility can be found here.
Can I claim the Employee Retention Credit for employees who are on leave?
The Employee Retention Credit (ERC) is a incentive for businesses, who were significantly impacted by the COVID-19 pandemic and were forced to reduce operations or close, to retain their employees and pay them wages. The ERC allows employers to claim a tax credit on wages that are paid up to a certain amount or, if they chose not to take the credit in one year, they can choose to carry it over until it can be claimed in the future.
One of the key eligibility requirements for claiming the ERC is that employers must be able to demonstrate that their business has been impacted by COVID-19 in order to apply for the credit. Businesses may also need to consider if their employees are considered “on leave” when determining eligibility for claiming the ERC.
Employees who have been furloughed due to reduced operations or closure would generally meet the definition of being “on leave” and would therefore not qualify for Employer Retention Credit purposes. However, employees who take leave from work due solely to illness, disability, or other qualifying reason would generally be considered eligible for inclusion within net qualified wages incurred after March 12th 2020 as long as other requirements are met. Employers should seek advice from a tax professional in order determine which employees qualify for this benefit and also consult IRS regulations on employee retention credits prior filing claims with IRS.
Frequently Asked Questions
A: The employee retention credit is a refundable tax credit created by the CARES Act to incentivize employers to keep employees on their payroll. It is available to employers whose operations have been fully or partially suspended due to a COVID-19 related shutdown or whose gross receipts decline by more than 50 percent compared to the same quarter in 2019.
A: The employee retention credit is equal to 50% of qualifying wages paid to an employee, up to a maximum of $5,000 per employee per quarter.
A: Eligible employers include businesses whose operations have been fully or partially suspended due to a COVID-19 related shutdown or whose gross receipts decline by more than 50 percent compared to the same quarter in 2019.