The Employee Retention Credit (ERC) is a program that was developed in response to the COVID-19 pandemic and the economic shutdown. This program offers companies and small businesses the opportunity to receive a refundable tax credit in exchange for maintaining their payroll during the years 2020 and 2021.
What exactly is the Credit for Employee Retention?
The Employee Retention Credit was established by Congress as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) with the intention of encouraging employers to continue paying their employees during the months in 2020 that will be impacted by the coronavirus pandemic. The credit was included in the CARES Act.
This tax credit was initially proposed to be worth fifty percent of qualified employee wages, but it was capped at ten thousand dollars for any one employee. As a result, the maximum credit that could be awarded was five thousand dollars, and it would be applied to wages paid between March 13, 2020 and December 31, 2021. Since then, it has been revised to bring the total proportion of eligible wages up to 70 percent by the year 2021. The maximum allowable compensation for each employee is now $10,000 every quarter, up from the previous limit of $10,000 per year.
However, other requirements apply to employers with under 100 employees and under 500 employees for specific sections of 2020 and 2021. The credit is accessible to all eligible employers of any size who paid qualified wages to their employees.
Who exactly is eligible to get the Employee Retention Credit?
Any employer in the private sector or tax-exempt organization that operates a trade or business during the calendar year 2020 and meets one of the following criteria is considered an eligible employer for the employee retention credit in the year 2020:
- either completely or partially halted activities during any calendar quarter as a result of directives from an appropriate government body prohibiting trade, travel, or group meetings owing to COVID-19; or
It had a considerable drop in total revenue during the calendar quarter; this loss was caused by.
The criteria for eligibility have been revised for the year 2021.
For an employer to qualify for the credit, more than a minor amount of their business activities must have been halted during the relevant time period. A portion of an employer’s business is considered more than a nominal portion of operations for the purposes of the employee retention credit if either the gross receipts from that portion of business operations are not less than 10 percent of gross receipts (determined by the same calendar quarter in 2019) or the hours of service performed by employee in that portion of the business is not less than 10 percent of the total number of hours of service performed by all employees in that portion of the business.
What exactly does it mean when a business temporarily stops certain of its operations?
In order for an employer’s business activities to be considered partially suspended, they must have been restricted as a result of a federal, state, or municipal order, proclamation, or decree that had an impact on the employer’s operations.
For instance, a restaurant that was forced to close its dining room as a result of an order from the local government but was still able to offer carry-out or delivery service is an example of a business that has partially ceased operations.
A portion of a firm’s activities may be temporarily halted if, for example, an order restricted the number of hours that the business could be open, or if some business processes were required to be shut down and work could not be done remotely.
Tool for the Eligibility of Employee Retention Credit
Thomson Reuters has revised the Employee Retention Credit Tool in order to assist all employers in determining whether or not they are qualified for the employee retention credit. This was done due to the complexity of the eligibility requirements for the credit.
How do I determine how much of a credit to provide for employee retention?
The credit for retaining eligible employees under COVID-19 for 2021 is equal to 70 percent of qualifying wages. The maximum amount of qualified wages that can be paid to any one employee in a single quarter is limited to $10,000 (this includes any qualified health plan expenses), and the maximum credit that can be claimed for any employee in a single quarter is $7,000. This results in a total credit of $28,000 for each employee for the calendar year 2021.
How do you go about making a claim for the employee retention credit?
On Form 941 for the quarter in which qualified wages were received, employers were required to declare the total qualified wages paid, as well as the corresponding COVID-19 employee retention credit. The wages that were paid out between March 13 and March 31, 2020, and that qualified for the employee retention credit were reported on the second quarter Form 941 (Employer’s Quarterly Federal Tax Return), in order to compute the employer’s credit for the quarter ending June 30, 2020. On all wages and compensation paid to any and all employees throughout the quarter, the credit was authorized to be applied toward the employer’s share of social security taxes (at a rate of 6.2%), as well as the railroad retirement tax. However, it is important to keep in mind that the rules will be changing for 2021. If the total amount of the credit was greater than the amount that the employer was required to pay toward those federal employment taxes, then the excess was considered an overpayment and was repaid to the employer.
An employer that is eligible to do so may lower the amount of employment tax deposits made during the quarter by the amount that is expected to be received as a credit for the quarter. The federal income tax that was taken from employees’ paychecks by their employers, as well as the employees’ portion of social security and Medicare taxes, as well as the employer’s share of social security and Medicare taxes with regard to all employees, may all be kept by the employer. If the employer’s retained employment tax deposits were insufficient to meet the expected credit amount, the employer had the option of submitting Form 7200 (Advance Payment of Employer Credits Due to COVID-19) in order to seek advance payment of the remaining credit amount.
Additional restrictions will be in place for the year 2021, and the credit will only be offered to employers of a certain size.
Employers that did not claim the employee retention credit for 2020 or 2021 on a quarterly payroll tax return have the option to file an updated return for each quarter for which the credit can be claimed. This option is only available until the end of the year. Employers who already file an annual payroll tax return have the option of claiming tax credits by filing an amended return with either Form 944-X (Adjusted Employer’s Annual Federal Tax Return or Claim for Refund) or Form 943-X (Adjusted Employer’s Annual Federal Tax Return for Agricultural Employees or Claim for Refund).
Will the ERC eventually run out of time?
Notice 2021-49 was issued by the Internal Revenue Service (IRS) on August 4, 2021. This notice provides additional guidance regarding the claiming of the Employee Retention Credit by employers who pay qualified wages after June 30, 2021 and before January 1, 2022 [IR 2021-165, Notice 2021-49]. This notice was issued on the same day that IR 2021-165 was issued. The ERC was scheduled to terminate on the 31st of December in 2020. Nevertheless, the ERC has had its funding under the Consolidated Appropriations Act (CAA) 2021 extended until the 30th of June in 2021. Additionally, the ERC rate of credit was increased from 50 percent to 70 percent of eligible wages as a result of the CAA. The ERC was extended one more until the date of December 31, 2021, and then its existence was terminated retroactively beginning on September 20, 2021.
Do you have access to the Paycheck Protection Program as well as the Employee Retention Credit?
According to the CARES legislation, an employer that took out a loan under the Paycheck Protection Program was eligible for the Employee Retention Credit unless the PPP loan was returned before the 18th of May in the year 2020. This prohibition was eventually eliminated as part of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which made it eligible for those who had received a PPP Loan to qualify for the Employee Retention Credit. On the other hand, wages paid with a PPP loan that are later forgiven do not count toward the qualifying wages for the credit.