What Employers Need to Know About the New Retention Credit
Overview of Employer Retention Credit
The employer retention credit is a refundable payroll tax credit, available to businesses and nonprofits who experience revenue loss due to the COVID-19 pandemic. The credit helps these employers offset the costs of wages paid and certain health insurance costs during the pandemic period.
This overview will provide an in-depth look at:
- Who is eligible to claim the credit.
- When employers can start claiming it.
- How the credit can be used.
Definition of Employer Retention Credit
The Employer Retention Credit (ERC) is a tax credit designed to provide financial assistance to employers affected by the COVID-19 pandemic. This credit was established as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Economic Recovery Tax Cut bonus allows employers to take an employee retention tax credit for qualifying wages that are paid after March 12, 2020 and before January 1, 2021.
The ERC is available for employers who have fully or partially suspended operations during any calendar quarter in 2020 due to government orders related to COVID-19 or who have seen a reduction in gross receipts of more than 50 percent compared with the same calendar quarter in 2019. Eligible employers can claim up to $5,000 in qualified wages per eligible employee each quarter they qualify. This includes employer contributions for health insurance and certain types of paid leave expenses, up to a maximum of $10,000 total per employee over all four quarters.
Employers may be able to claim both the ERC and a refundable payroll tax credit for providing emergency paid leave benefits however there are rules about how these credits can be claimed together so it’s important for employers to understand their eligibility before taking advantage of these credits.
The new Employer Retention Credit encourages businesses to keep employees on their payroll by providing a fully refundable credit against certain employment taxes equal to 50 percent of qualified wages paid from March 13, 2020 through January 1, 2021.
In order to qualify for the credit, employers must meet certain eligibility requirements. For employers to be eligible for the Employer Retention Credit, employers must:
- Be an eligible employer
- Have experienced and are experiencing an economic hardship due to COVID-19
- Were in operation on February 15, 2020; and
- Maintain your employee count.
Eligible employers are defined as any U.S. trades or businesses with full or part-time employees, including nonprofit organizations and all governmental entities that were previously subject to the employer portion of Social Security contributions during either calendar quarter in 2020 or 2021 (referred to as Qualified Wages). Furthermore, eligible employers include those that began operations after February 15, 2020 who were not in business during all four quarters of 2019 but had wages reported under federal form 941 for any calendar quarter in either 2020 or 2021.
Eligible employers can receive up to $5,000 per employee in credits each year, with a maximum credit amount based on wages paid from March 13 – December 31 of each year up to $10,000 per employee (referred to as Qualified Wages). The qualified wages can include salary, wages and health plan expenses paid during calendar years 2020 and 2021 up to $10K per employee per year. The credit is calculated quarterly based on the current quarter’s qualified wages paid during those periods compared with the base period period's previous quarter’s average qualified workplace expenses paid or incurred for each calendar quarter ending prior February 1st ,2020 April 30th ,2020 July 31st ,2020 and October 31st ,2020.
Maximum Credit Amount
The employer retention credit is designed to incentivize employers to continue paying employees and keeping them on the payroll even during times of economic hardship. It provides a refundable tax credit of up to 50 percent of qualified wages (including certain health care expenses) paid by employers whose operations were suspended due to COVID-19 related shut down orders, or whose gross receipts declined by more than 50 percent when compared with the same quarter in the prior year.
The maximum credit amount is based on two factors: the amount of eligible wages incurred, and the number of full-time employees employed. The total possible credit is limited to $5,000 per employee and can be claimed for up to 500 employees, resulting in a maximum aggregate credit available per employer of $2.5 million. Additionally, due to recent updates in IRS guidance, employers are eligible to claim a partial credit for unpaid wages and health care expenses incurred after December 31, 2020 even if those wages or expenses weren’t part of any prior quarter’s claim for the employer retention credit.
However, employers should note that this is subject to change as IRS regulations are updated going into 2021 and beyond. Furthermore, some entities may be excluded from eligibility for the employer retention credit due to their size or type – consult with your accountant or financial advisor before making any claims.
Calculating Employer Retention Credit
Employer Retention Credit is an important tax credit that helps businesses keep their employees on board during difficult economic times and pay them their salaries. This credit can be used to reduce the employer's portion of payroll taxes and provide a much-needed cash flow to businesses.
Calculating the employer retention credit can be a confusing and tedious task, so let's take a look at the process in detail:
The amount of wages a business can include in calculating the employer retention credit depends on the size of its average number of employees. The wages paid to certain employees include those paid between March 13, 2020 (the CARES Act enactment date) and December 31, 2020 for which qualified sick and family leave wages can be claimed under the Families First Coronavirus Response Act or other qualified health plan expenses taken into account under the refundable payroll tax credit provided under section 45S of the Internal Revenue Code may not be used to calculate qualifying wages.
For businesses with an average number of full-time employees during 2019 greater than 100, only qualifying wages that are allocable to a period during which an employer's operations are fully or partially suspended due to orders from an appropriate governmental authority due to COVID–19 can count toward their employer retention credit calculation. Qualifying wages eligible for this purpose are those paid to an employee when they are not providing services due to business suspension and includes amounts paid for group health plan expenses for that same period.
For employers who averaged fewer than 100 full-time employees in 2019, all qualified wages can be used in calculating the employer retention credit. This could include amounts paid from March 13–December 31, 2020. Qualified wage payments must be included in computing Social Security taxes required by section 3121(a)(1) and reported on Form W-2, Box 6 (referred to as “statutory” wages).
Qualifying Health Plan Expenses
Qualifying health plan expenses are defined as the employer’s cost of providing and maintaining a group health plan for employees including paying premiums for medical, vision, dental, and/or prescription drug coverage. This includes any amounts contributed as pretax employee premium payments excluded from income tax (but not from FICA taxes). Additionally, the employer may qualify based on subsidizing employee COBRA payments or providing post-employment health insurance coverage continuation. Employers who pay premiums directly to insurers on behalf of their employees generally will have a greater overall retention credit amount than those that are reimbursing their employees.
It is important to note that only expenses paid during the period beginning March 13, 2020 and ending before January 1, 2021 are eligible to be taken into account when calculating the employer retention credit. Additionally, Qualified Health Plan Expenses also include eligibility costs subject to a common-law test between related businesses such as in an affiliate group or businesses under common control. Eligible health plan expenses can pre-date the CARES Act but must be paid during this limited timeframe in order to be eligible for the credit.
Calculation of Credit
The employer retention credit (ERC) is a payroll tax credit available to employers affected by COVID-19. Eligible employers can receive a credit of up to $5,000 per employee per quarter based on the amount of wages paid during the quarter and the number of employees employed during that period. The ERC is available for qualified wages and qualified health plan expenses paid by employers after March 12, 2020 and before January 1, 2021.
To figure out how much an eligible employer can receive in terms of credit, it’s important to understand how the calculation works. The ERC is calculated as a percentage of the employer’s qualified wages or qualified health plan expenses per employee and it applies only to amounts paid in qualified periods (i.e., the six months before December 31, 2020). The maximum amount you may receive in retained credits is limited to 50% of qualified wages or health plan expenses up to $10,000 per employee across all qualifying periods.
In order to calculate your ERC amount, you must first determine your eligible period (i.e., which calendar quarters you may be able to take advantage of this program). You should then calculate an allowable credit for each qualifying quarter by multiplying your average monthly full-time equivalent employees for that quarter times your total wage costs or total health care costs for that quarter (up to $10K/employee). Adding those three numbers together should give you your total ERC amount for each qualifying period.
Claiming Employer Retention Credit
The employer retention credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to certain employees during the eligible period. With the employer retention credit, eligible employers can receive up to $5,000 for each employee for qualified wages paid during the eligible period.
In this article, we will discuss how to claim the employer retention credit.
Employers can request the retention credit in one of two ways: claiming the credit on a quarterly basis through Form 941, Employer’s Quarterly Federal Tax Return; or by claiming it as an advance payment through Form 7200, Advance Payment of Employer Credits.
Claiming the employer retention credit on Form 941 is a great option for employers with access to sufficient liquidity from other sources. If a business has already paid taxes covering its calculated amount of employer retention credit on Form 941 prior to filing its return, the IRS will either provide a refund or apply them to any taxes owed.
To claim the employer retention credit via Form 941, employers must complete Part 4 of their quarterly return and enter their calculation for ERTC into Line 19a and 19b. The amount in Line19c should match your total in line 13 (total taxes). In order to complete parts 15 – 18 as required, you may need to consult Publication 15-A: Employer’s Supplemental Tax Guide. Generally, these require information like withholding wages subject to Medicare tax, sick pay subject to OASDI/EE withholding and qualified wages.
Finally, don’t forget that all businesses claiming the ERTC must also retain relevant documentation such as payroll records reflecting accurate wages paid during quarter 2020 and supporting information regarding employee counts related to COVID-19 reductions before filing Form 941.
Form 940, Employer's Annual Federal Unemployment tax Return, is used by employers to report and pay the employer’s share of FUTA tax owed for the current year. It is filed on an annual basis.
Employers may be eligible for the federal Employer Retention Credit (ERC) if they pay qualified wages to employees from March 13 – December 31, 2020. To qualify for the credit, employers must meet certain conditions and submit Form 940. The credit is equal to 50 percent of qualified wages (up to $5,000 per employee).
Eligible employers must first complete lines 3 through 8 of Form 940. They should include all qualified wages paid to each employee on line 10 and subtract any applicable credits calculated in lines 11 and 12. The net FUTA tax due should be calculated on line 14a. The ERC should then be calculated separately on line 14b before being entered into line 15 as a negative amount thus reducing the net FUTA tax actually due by this amount.
The ERC is not refundable so any remaining balance after calculating the ERC cannot be claimed as a refund or excess credit against future tax years. If there are no balance amounts owing after applying the ERC then there will be no need to submit payment with Form 940 as it will already reflect a zero payment amount at this point in time.
Form 943 is the IRS form used to report federal income tax withheld from wages for agricultural employees for the current tax year. Employers may be eligible for an employer retention credit by filing Form 943 and claiming a refundable payroll tax credit against certain employment taxes. The credit is refundable if it exceeds your federal income tax withholding and FICA taxes due. This can potentially provide a significant financial benefit.
In order to be eligible, employers must have:
- An active business operating in 2020 or 2021
- Experienced a 50% or greater revenue loss in 2020 compared to 2019 revenue OR experienced full or partial suspension of operations by government orders due to the Covid pandemic
- Paid qualifying wages between March 12, 2020 and January 1, 2021. Qualifying wages are defined as wages paid up to $10,000 per employee from March 12th – December 31st of 2020, plus amounts paid after January 1st through June 30th of 2021 (which should not exceed more than half the amount of qualifying wages paid for 2020).
Employers must file Form 943 with the IRS no later than February 28th of each year in which the credit is claimed in order for the employer retention credit to apply. Employers should keep records regarding eligibility and payment amounts so they are ready when filing Form 943 with all supporting documentation necessary.
Finding resources to help understand how to apply for and qualify for an employer retention credit can be difficult. Fortunately, there are many resources available to employers to help understand the details. From websites, to podcasts, to white papers, there are plenty of resources out there to help employers understand the rules and regulations of the employer retention credit.
This section will cover all of the available resources and information about the credit:
The Internal Revenue Service (IRS) website offers a number of resources to help employers understand and qualify for the Employer Retention Credit (ERC). The ERC is a refundable tax credit that helps employers keep and rehire workers in 2020 who were affected by COVID-19 related business closures or operations disruptions.
The IRS site contains answers to frequently asked questions about the Credit, requirements for eligibility, information about filing for the credit, and other related topics. The agency also provides access to forms and instructions needed to claim the credit as well as additional fact sheets and publications with information about employee wages covered under the program, claiming on amended returns and computational rules for computing the amount of ERC available.
In addition, visitors can:
- Subscribe to email updates about Employer Retention Credit-related topics receive notifications when guidance is issued or updated by signing up through the IRS web page dedicated to this topic.
- The page regularly changes as more information becomes available so it’s important to visit often if you want be kept apprised of new developments related to this issue.
IRS Publication 15
The IRS Publication 15 provides employers and employees with detailed information and guidance specific to employer retention credits, including information on how to calculate and claim the credit, the types of organizations eligible for the credit, the limitations for claiming it and other associated rules. The publication is available online through the IRS website, allowing taxpayers access to updated information as laws and regulations change.
It is important to review Publication 15 when considering taking advantage of the employer retention credit. Additionally, many other resources are available online that may prove helpful in navigating relevant tax issues. In particular, businesses seeking additional tax guidance related to employers retention credits should consult a qualified tax advisor or accountant.
Tax Professional Resources
For employers looking to take advantage of the tax-saving benefits associated with the employer retention credit, it is important to work with a qualified professional. Tax professionals such as accountants, enrolled agents, and attorneys can help interpret the requirements of the credit and determine if an employer qualifies for the benefit.
In addition, some Professional Employer Organizations (PEOs) may provide guidance to employers relative to their business’ eligibility for this benefit. Fiduciary advisors can help interpret legal documents such as employer plans and policy statements.
Businesses that self-administer payroll should ensure they are up-to-date on deadlines, forms and filing procedures in order to successfully apply for this credit. It is also advisable that employers refer to their state department of revenue’s website or publication to determine any applicable state or local restrictions associated with filing claims for this credit.
Following these steps can help ensure an easy application process; however, if any additional questions arise regarding the utilization of this valuable financial benefit, further resources may include:
- State Department of Revenue websites
- Internal Revenue Service guidelines
- IRS Form 941 instructions
- Internal Revenue Code Section 2020G-1 requirements
Frequently Asked Questions
Q: What is an employer retention credit?
A: An employer retention credit is a refundable tax credit available to employers that pay qualified wages to employees during the COVID-19 pandemic. The credit is equal to 50% of qualified wages (up to $10,000 in wages per employee) paid to employees between March 13, 2020 and December 31, 2020.
Q: Who is eligible for the employer retention credit?
A: To be eligible for the employer retention credit, a business must have experienced either a full or partial suspension of its operations due to a COVID-19 related governmental order or a significant decline in gross receipts. Eligible employers must also have fewer than 500 employees and must have paid qualified wages to employees.
Q: How do I claim the employer retention credit?
A: The employer retention credit is claimed on Form 941, Employer’s Quarterly Federal Tax Return. Employers can also claim the credit on their quarterly estimated tax payments and receive an advance payment of the credit from the IRS.