Despite the fact that the Infrastructure Investment and Jobs Act terminated the Employee Retention Credit (ERC) retrospectively in November 2021, businesses still have the time to claim the credit on their tax returns for the year 2021. The Emergency Relief Commission (ERC) was initially established in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in order to provide monetary assistance to businesses whose operations were disrupted as a result of the pandemic. Subsequent legislation has since amended, extended, limited, and most recently terminated the ERC. The most recent measure pertaining to infrastructure stipulates that the credit will only be available through the third quarter of 2021; hence, any wages earned beyond September 30, 2021 will not be qualified for the credit.
If you are eligible for the ERC, you might get substantial credit amounts as well as immediate monetary relief. As you start compiling information for your tax returns for the year 2021, here are certain things you really must keep in mind.
What exactly is the Credit for Employee Retention?
It is a tax credit that can be completely refunded to you based on a proportion of the eligible wages that you pay your employees. It is deducted from the amount of federal payroll tax that you owe. Any quantity of credit that is not used is forfeited.
Do I meet the requirements to receive this credit?
This credit is available to tax-exempt organizations and commercial enterprises that are operational during any calendar quarter of 2020 or 2021. Nevertheless, they are required to have:
- Completely or partially ceased business operations for any given calendar quarter in 2020 or 2021 as a result of directives from the government prohibiting trade, travel, or group gatherings because of COVID-19, OR
- Observed a substantial quarter in total receipts during one of the calendar quarters in 2020 or 2021
Employers working for the government and people who are self-employed are not qualified for this credit.
Example
In March of 2020, a large number of businesses were coerced into suspending operations that aren’t essential to maintaining or preserving life. You are probably qualified for this credit if, in order to comply with this order, you were required to make significant adjustments to the way that you do business (for example, you had to completely or partially cease operations).
One example of partly suspending operations would be to close the inside dining area but continue to serve takeaway. A good example of entirely stopping operations would be to temporarily close all components of your business in accordance with the order issued by the government.
How exactly does one go about obtaining the Credit for Employee Retention?
The ERC for the year 2020 is equal to fifty percent of the total amount of eligible wages that you paid out to employees between March 12, 2020 and December 31, 2020. There is a cap of $10,000 in wages for each employee across all of the quarters. As a result, you are eligible to claim a credit of up to $5,000 for each individual employee.
The credit for 2021 is equal to seventy percent of the total eligible wages that you pay your employees between January 1, 2021 and September 30, 2021. The maximum wages for any one employee in any one quarter are capped at $10,000. As a result, you are eligible to claim a deduction of $7,000 for each employee for each quarter. The maximum credit available to each employee is $21,000.
If your business is one that is judged to be in the early stages of the recovery process, the total credit you can receive is capped at $50,000 every calendar quarter. The credit can be used to wages that are paid up until the 31st of December, 2021. You are not restricted to wages that were paid by the 30th of September in 2021. Startup businesses that are part of the recovery are those who started operations after February 15, 2020, and have average annual gross receipts that are less than one million dollars.
What is meant by the term “Qualified Wages”?
In general, qualifying wages are defined as remuneration that you pay to employees, and this might include qualified health plan charges. Nevertheless, the definition also is contingent on your organization’s average number of full-time employees in 2019. In the event that your business does not exist in the year 2019, you should make use of the average number of full-time employees in 2020.
It’s possible that the health care benefits you continue to offer to employees who aren’t working might count as qualifying wages for them. If your company is fully insured, self-insured, or a combination of the two, the amount of health care benefits that may be allocated to each employee differs depending on which option your company chooses. Consult with a business tax professional to maximize that you accurately calculate and get the most of your credit amount if the only expenses that qualify for this credit are those related to group health care costs.
Now, if you are an employer who is regarded as being in a serious state of financial hardship, you have the ability to consider any wages paid during the third quarter of 2021 to be qualifying wages. An eligible employer is considered to be seriously financially distressed if they have seen a reduction in gross receipts of more than 90 percent when compared to the same calendar quarter in 2019 as the previous employer.
Credit for the 2020 Employee Retention Campaign
1. If in 2019, your business had an average of more than 100 full-time employees, qualifying wages are the wages that you paid to employees who aren’t providing services because of one of the following reasons:
- The full or partial cessation of operations as a result of an order issued by a governmental body owing to the coronavirus; OR
- A large drop in gross receipts
If you fall into this group, the eligible wages can’t be more than what you would have paid the employee for a similar amount of time and the same number of days during the 30 days prior to your economic hardship.
2. If your business had an average of less than 100 full-time employees in 2019, eligible wages are wages that you paid to any employee due to the following reasons:
- The full or partial cessation of operations as a result of an order issued by a governmental body owing to the coronavirus; OR
- A large drop in gross receipts
Whether or not an employee is working in time in the office does not have any bearing on whether or not they are eligible for qualified wages if they fall into this group. Your credit amount is impacted by each and every employee that you continue to pay.
Credit for the Retention of Employees in 2021
1. If in 2019, your business had an average of more than 500 full-time employees, qualifying wages are the wages that you paid to employees who aren’t providing services because of one of the following reasons:
- The full or partial cessation of operations as a result of an order issued by a governmental body owing to the coronavirus; OR
- A large drop in gross receipts
2. If your business had an average of less than 500 full-time employees in 2019, eligible wages are wages that you provided to any employee due to the following reasons:
- The full or partial cessation of operations as a result of an order issued by a governmental body owing to the coronavirus; OR
- A large drop in gross receipts
If you are considered a small employer, any wages that you pay within a period that is eligible for the ERC are considered eligible. If you are a major business and during the years 2020 or 2021 you do not pay any of your employees for not working, then you are not entitled for this credit. If, on the other hand, you pay employees both while they are working and when they are not working, then the wages you pay employees when they are not working are eligible for this credit.
Toys Inc. is a significant employer, and during the month of February 2021, Ted was compensated for working a total of forty hours. He worked 10 hours and didn’t work 30 hours. In this scenario, any wages that you paid Ted for his job should not be factored into the calculation of the credit. Only the wages that you gave him for not working for a period of 30 hours qualify for this credit, and only those wages are available.
Who is a Full-Time Employee and What Do They Do?
A employee is considered to be working full time if they are employed for at least 30 hours per week or 130 hours per month (on average). The number of hours worked in 2019 will determine full-time status.
How do you calculate the amount of credit that should be given to each employee?
The credit is computed based on the qualifying wages that are paid to employees on a quarterly basis by the employer. Here are some instances.
Credit in 2021
- You will hand over $10,000 to Keith at the beginning of the first quarter of 2021. You are eligible for a credit equal to seventieth of the amount of qualifying wages, which is $7,000. You will hand over $10,000 to Keith in the second quarter of 2021. You are once again eligible to claim a credit of $7,000 for the second quarter.
- In the second quarter of 2021, you will pay Kelly $8,000. In the third quarter of 2021, you will pay her $12,000. Your credit for Quarter 2 is $5,600, and for Quarter 3, it is $7,000. Since Kelly’s wages for the third quarter were greater than $10,000, the credit computation was restricted at that amount. 70 percent of $10,000 equals a $7,000 credit.
Credit for 2020
- In the second quarter of 2020, you will pay Amy $8,000. In the third quarter of 2020, you will pay her $6,000. Your credit for Amy is $4,000 in the second quarter and $1,000 in the third quarter. After you have reached the limit of $5,000, any extra wages that you pay Amy in the year 2020 will not add to your credit amount.
What Does It Mean When Gross Receipts Fall by a Significant Amount?
When compared to the same calendar quarter in 2019, gross receipts for the year 2020 are expected to fall by a substantial amount of fifty percent. The considerable reduction will halt when your gross receipts for the first calendar quarter of 2020 are more than 80 percent of your gross receipts for the same calendar quarter in 2019.
When compared to the same quarter in 2019, gross receipts are expected to drop by a considerable 20 percent in 2021. You are permitted to utilize the gross receipts from the quarter before as your benchmark for the first quarter of 2021 thanks to a safe harbor provision that has been made available. For example, in the first quarter of 2021, you may compare the gross receipts for the first quarter of 2021 to those of the first quarter of 2019, or you can compare the gross receipts for the fourth quarter of 2020 to those of the fourth quarter of 2019.
Your complete income is known as your gross receipts when it has not been reduced by any returns or discounts, any operational expenditures, or any outstanding bills. Simply put, it is the sum of all of the money that your business made during the tax year in question. You are required to calculate your gross receipts using the same basis that you use for the purposes of filing your taxes.
Example: You have gross receipts of $250,000 during the first quarter of 2019. Your total gross receipts for the first quarter of 2021 amount to $100 000. This is the beginning of a substantial downturn, since it represents a drop of more than twenty percent. Your total gross receipts for the second quarter of 2019 were $200,000. Your total gross receipts for the second quarter of 2021 are $150,000. Because the decline in your gross receipts is greater than twenty percent, you are eligible to submit an ERC claim for the first and second quarters of 2021.
Please go here to see our flowcharts if you are attempting to determine whether or not you are eligible for the ERC. This is a streamlined and step-by-step method that will assist you in determining whether or not you are eligible in the years 2020 and 2021.
How Do You claim Your Application for the Employee Retention Credit?
Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, is where you will accurately report your qualified wages and related credits for each calendar quarter that you are eligible for the credit. This will be done for each credit that you are eligible for. If you are eligible and choose to claim the credit, you will need to adjust the total wages that you recorded as having been earned during the tax year on your return for that particular year of income tax. This may mean that you will need to file updated income tax returns for the 2020 tax year if you want to avoid any potential penalties. You should submit an application for the credit in 2021 before you finish preparing your income tax returns for that year.
What Else Should I Be Aware Of Regarding the Employee Retention Credit?
Because to COVID-19, you are eligible to claim both the ERC and the tax credit for giving paid leave to your employees. You cannot, however, claim either credit for wages earned at the same time. You also are not permitted to factor in the wages received for paid leave when calculating the amount of qualifying wages for the ERC. Make sure to keep them apart.
If you are awarded a grant from the Restaurant Revitalization Fund or the Shuttered Venues Operator Grant, you will not be able to utilize the wages paid with those grants to claim for the Enhanced Recovery Credit. You are nonetheless permitted to use restaurant grant monies until 2023, during which time you can pay for business expenditures other than personnel costs. It is quite possible that you will be able to maximize a restaurant grant and claim use of the ERC.
You are now eligible to claim for the ERC if you have obtained a loan from the PPP. You were required to make a decision between this credit and a PPP loan when the CARES Act was initially approved. You are not eligible to claim this credit for wages that you paid with your PPP loan if you submitted an application for debt forgiveness and it was accepted. In the event that your request for forgiveness is denied, you will be able to make a claim for the ERC based on the wages that were paid using the PPP loan.