A Complete Guide About Employee Retention Credit Program

What Exactly is ERC?

ERC stands for Employee Retention Credit. The ERC works by providing a refundable tax credit. Since it is a payroll tax credit, you can claim it on your personal income tax return and receive a refund. ERC is not dependent on the reason for a person to leave the job and is not a taxable benefit. Once the ERC is paid to the employee, you can claim a credit equal to 50% of qualified wages. However, a repayment period is required.

Paying ERC to an employee with payroll taxes deducted from wages does not impact the taxpayer’s credit limit. You are allowed to charge up to $3,700 for payroll taxes. If you have more than $3,700 to pay, the total amount does not matter. Also, you are able to spread your payments out through the normal payroll deductions (wages plus self-employment tax).

The standard deduction amount, for tax year 2017, is $18,350, which is paid by most taxpayers who file a Schedule A. The ERC is available for full-time employees (without dependents) who do not receive an EIC. The ERC is non-refundable. An ERC account can be opened at any post office in the United States. You can either cash out your credits or roll them over. You will be subject to a 10% penalty when rolling over credits.

Who Qualifies For ERC?

Employees that worked for an employer that has its own payroll and in an eligible state and has been on payroll for one year as of December 31, 2019. Employers must file Form 6251 with the IRS. There is no limit on the number of credits you can take. Eligible states include Alaska, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Hawaii, Idaho, Illinois, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Dakota, Oregon, Rhode Island, South Dakota, Tennessee, Utah, Vermont, West Virginia, Washington, and Wisconsin.

However, the Department of Labor has said that residents of these states who work for companies that have their own payroll systems should contact their state unemployment agency to determine whether they are eligible to take the ERC. In addition, these states that have the ERC are California, Illinois, Missouri, Montana, Oregon, and Vermont. It does not matter if you are an independent contractor. This exception means that if you were unemployed for any reason and worked for a company that had its own payroll, then you are eligible for ERC.

Explanation of ERC

There are many situations where an employer might decide to let a portion of an employee’s pay go unpaid while an employee is with an employer. This often happens during a period when there are changes in income tax rates, whether by way of a reduced income or a change in tax withholding, or because of a merger or downsizing.

It is unfortunate that a sub-optimal solution is used, as it was in the SARS crisis. Instead of making payroll and tax withholding adjustments, employers often let some of an employee’s wages go unpaid. (It should be noted that under a law passed by Congress in the wake of SARS, an employer who makes no payroll adjustments would be subject to a felony charge for payroll fraud.)

• Under the ERC, a portion of a worker’s salary can be deducted from wages as a payroll deduction, which is then refunded to the employee. This procedure is referred to as a Paycheck Protection Program loan. The loan is provided as a payroll deduction and can be used for payroll deductions or for health insurance, depending on whether the employee is part of an ERC employer or a Paycheck Protection Program employer.
• If an employee’s wages are paid for in whole by an ERC employer, the loan that the employer makes can go toward employee payroll deductions or insurance. In this scenario, the employee has no contribution to make to ERC payroll deductions or insurance.
• If an ERC employee’s wages are paid for in part by an ERC employer, and the ERC employer’s payments for the ERC employee are paid from wages paid for in whole by the ERC employer, the loan the ERC employer makes for the ERC employee can go toward an ERC employee’s premiums or pay-as-you-go coverage.

For any employee working in a state that is not covered by an ERC employer, the ERC loan can be used toward a state employee’s state premium contributions, but must not exceed the employee’s net pay as a percentage of the total wages paid, as discussed below.

• The maximum ERC loan can be up to $4,000 per employee for up to two years in total. Note that this limit is for the whole employer/employee relationship and may be less or higher for any individual.
• The ERC may be repaid when the individual returns to work at the same employer or a new employer, or upon any termination of employment for cause. Repayment will be subject to 15% of the ERC amount received to repay the loan (if repaid), as calculated by an employer.

In order to receive a credit, an employee must have been employed by the employer for at least 90 days. The employee must also be subject to the following conditions:

1. The employee is a single individual.
2. The employee is employed full time.
3. The employee is a salaried employee with the same base pay and is working for the same employer.

The employee’s base pay is generally the amount that is listed on their W-2 statement. The employer, therefore, is responsible for the ERC amount; the ERC employer does not make any deductions.

In order to receive a credit, the employer must also:

1. Provide the employee with a notice that explains that the loan is available and sets forth the repayment plan.
2. Provide the employee with the notice that explains the repayment plan, and the employee must also return it within 30 days from the date that it was sent.
3. The employee must return a certificate showing proof that the employee’s ERC employer has begun the repayment process and, when required, provide proof of the ERC amount the employee repaid, as required by the IRS.

To obtain a loan for ERC insurance, an employer may make loan repayments on an employee’s behalf, but, if the repayment plan is not used, the employee will have to repay the loan to the employer. The employee must make at least minimum ERC contributions (to make up the ERC loan amount) and the contributions must be made in whole by the employee. For the purposes of the income tax withholding table, this contribution must be from an amount that would otherwise be taxable income for the employee, but is not taxable to the employee. (Note that an ERC contribution is not counted as tax-exempt income by the IRS.)

For any employee working in a state that is not covered by an ERC employer, the ERC employer may make additional contributions toward the employee’s insurance coverage. Any contributions the employer makes to cover the additional costs of ERC insurance will be made out of employee wages paid to cover the additional costs. For any employee working in a state that is not covered by an ERC employer, the ERC employer is responsible for the insurance premium. The amount the ERC employer makes for this premium is deductible as a medical expense in computing a federal tax return.

A claim for an ERC medical expense deduction must be fully and correctly itemized, which means the individual must have all information on the expense itemized in the standard deduction. As a result, it is important that ERC employers complete an annual form, Form 8965, detailing ERC costs, including medical insurance, and submitting this form to the IRS. The ERC employer is also responsible for the payment of any employee premiums for ERC insurance on behalf of the employee.

Non-Employee Share

In most states, the employer is required to pay an employer share of the employee’s health insurance premium for the individual, with cost sharing limited to the employee’s share. An employer’s share of the employee’s cost of an ERC policy is a “nonemployee share.”

Since the ERC employer must make the first dollar of contributions, if the employer does not make any contributions at all, the individual must make all additional contributions. (Individuals who are covered under an employer health insurance plan also generally make the “nonemployee share” contributions for the employer’s share.)

For employees whose spouse is covered by group insurance or whose employer pays a group insurance premium for the family, the employer should make these contributions for the family as a whole, but may also make contributions for individual members. In those situations, the employer is generally responsible for the family contribution.

Under most states, the employer must make contributions to the employee’s ERC health coverage directly, by payroll deductions. If the employee is self-employed, the ERC employer may pay either an employee share or a nonemployee share for health insurance on behalf of the individual. Either type of contribution to the employee’s ERC health insurance coverage is deductible as a medical expense in computing a federal tax return. (A nonemployee share is not counted as tax-exempt income by the IRS.)

Self-Employment Medical Plan Premium and Premium Deductions

A nonemployee share of an employee’s ERC policy costs the employee, based on the rules in the state where the individual is employed. Since the employer makes the nonemployee share, the self-employed individual is responsible for making the nonemployee share payment. In most cases, the self-employed individual will pay the nonemployee share of the premium for a self-insured ERC insurance policy directly from personal income.

If the individual’s employer provides an ERC insurance policy, the self-employed individual can elect to receive the premium directly from the employer, or to pay the premium directly from his personal funds. When he pays the premium from personal funds, the self-employed individual must complete Form 1065, “Self-Employment Medical Plan Premium and Premium Deductions.”

Many states require that self-employed individuals carry a certificate of insurance and/or the certificate of insurance in the individual’s own name as proof of liability insurance on behalf of the individual. Many states also require that the certificate of insurance must show that the insurance company or agent certified that the ERC insurance is in effect and that the insurance policy, if any, is valid.

Self-Employment Medical Plan Premium Payment Guidelines

Self-employed individuals who make a nonemployee share payment to their ERC coverage, or who pay the premiums for the ERC coverage themselves, can use the following guideline for making payments. Self-employed individuals should be sure to make the most cost-effective possible payments to their ERC health insurance coverage. Self-employed individuals may take advantage of the following payment guidelines.

1. A self-employed individual whose self-employed medical insurance premium payment is $100 per month or less, or less than $3,000 per year, may deduct the amount of that payment in computing the self-employed individual’s personal income taxes.
2. A self-employed individual whose self-employed medical insurance premium payment is more than $100 per month, or more than $3,000 per year, but less than the employee share payment, may deduct no more than $6,000 per year, or the total of the employee share and nonemployee share payments for the year, whichever is less.
3. A self-employed individual whose nonemployee share payment is $100 per month or less, or less than $3,000 per year, may deduct $6,000 per year, or the total of the self-employed individual’s nonemployee share payment and nonemployee share payment for the year, whichever is less.
4. A self-employed individual whose nonemployee share payment is $100 per month or less, or less than $3,000 per year, and/or who makes an ERC contribution, or who makes a self-employment tax payment, is not required to make any payments to the ERC health insurance coverage for tax purposes.
5. If the nonemployee share is fully deductible, the individual may reduce his tax obligation by the ERC amount, or deduct the amount of the nonemployee share payment in computing the self-employed individual’s personal income taxes.
6. The individual’s self-employed medical insurance premium payments for any given year will be determined based on the individual’s personal medical insurance premiums for the year. This amount will be the aggregate of any premiums paid for self-employed individual medical insurance for a self-employed individual, any self-employment tax payments for the year, and any premium payments for the ERC health insurance coverage for self-employed individual.
7. The self-employed individual will then deduct the amount of the premiums for self-employed individual medical insurance for the year from his self-employment income for the applicable tax year. The self-employed individual may increase his self-employment income by the amount of the nonemployee share payment, or deduct the amount of the nonemployee share payment in computing the self-employed individual’s personal income taxes.
8. If the self-employed individual is married and the nonemployee share is used to offset the self-employed individual’s combined taxable income, the self-employed individual will take the amount of the nonemployee share payment for the applicable tax year multiplied by the percentage of the income which is the self-employed individual’s taxable income. The percentage varies by individual tax filing status and the applicable marginal tax rate. The resulting number of ERC payments will be the total amount of the deductible self-employment medical insurance premium payments.
9. Individuals subject to a limitation are required to make ERC health insurance payments for one calendar year for a self-employed individual and two calendar years for a non-self employed individual. The amounts may be made on a quarterly or semi-annual basis, except for self-employed individuals in certain taxable occupational groups who are subject to a full-year limitation.
10. Self-employed individuals will be considered to be in an applicable taxable occupational group if the self-employed individual, for an employee of the self-employed individual, or the nonemployee individuals, paid no more than $30,000 of self-employment income for the tax year. For the purposes of the limitations and related rules, self-employed individuals are not considered to be in an applicable taxable occupational group if the self-employed individual, for the self-employed individual, or the nonemployee individuals, paid less than $600 in self-employment income for the tax year.
11. Employers, regardless of whether they are self-employed individuals or non-self-employed individuals, are not required to pay an ERC premium for their employees or, if they do, they are not subject to a self-employment tax on the ERC payments. A self-employed individual is not required to pay an ERC premium if the self-employed individual, for his or her self-employed individual, or for his or her nonemployee co-employees, paid no more than $500 of self-employment income for the tax year, and has at least $50,000 of self-employment income, if any, paid during the year to the self-employed individual or to any of his or her self-employed individual’s nonemployee co-employees.

An employer of an eligible full-time employee and self-employed individual may elect to enroll in the Paycheck Protection Program (PEPP). With the PEPP, a portion of the wages paid to the self-employed individual may be used to repay up to 30% of the ERC paid to the individual. You can choose to either receive the ERC in an EIC or a refundable tax credit. It may reduce the payroll tax bill and increase the size of the individual’s personal return. To be eligible, the individual must have worked full-time for an eligible employer for 12 months (or the first six months if they met the definition for unemployment), have income that is either self-employment based or eligible for unemployment, and not have been permanently dismissed from the company. Self-employed individuals must meet the following requirements:

• Be eligible to receive unemployment benefits if your personal gross income for the tax year is less than ,637 if you are single or $28,904 if you are married filing jointly
• Be an independent contractor who is paid by an employer for services and compensation for goods or services
• Be in compliance with applicable state and federal laws
• Are not a dependent
• The ERC is not refundable
• The ERC is cumulative, with additional credits added for each additional month worked and up to a maximum of 30% of the ERC is refundable
• The full tax rate is applied to the ERC at 100% for earnings up to $14,637 ($14,547 if the individual is age 65 or older or younger than 21)
• The tax credit is reduced by the ERC

So, in other words, employers with employees can transfer up to 30% of the ERC amount to the individual.

What Can You Do With Your Earned Income Credit?

Using the EIC or the ERC to pay bills is a nice addition to the EIC. This is especially important if you are self-employed and do not receive the EIC. However, in some cases, you are better off using the EIC to pay off the unemployment portion of your debt.

• Credit unions in your area may offer EIC loans that can be obtained through an employer. The interest rates on the EIC loans are currently 1.75% to 2.25% depending on the credit union. Some employers will provide these EIC loans, although most will not.
• EIC loans typically have a few features. They generally will have a teaser rate, which is lower than the cost of the EIC loan and are generally for short terms, ranging from one to three years. The interest rates on these loans range from 2.0% to 2.25%.
• The biggest drawback of the EIC loan is the requirement that the EIC loan not be rolled over, which makes EIC loans expensive compared to a traditional EIC loan.

If you can not find an employer or an EIC loan you qualify for, it is sometimes still possible to take advantage of EIC with payday lenders. We have found that EIC lenders will usually write off the interest on loans to self-employed individuals that will be repaid within a couple of months, even if the EIC loan will be repaid in 12 months. It is not advisable to use an EIC loan from a payday lender. The interest rate typically is around 27%, which is significantly higher than the national average interest rate of 16%. There are also other fees that you will have to pay, such as service fees and taking a cash advance.

Temporary Standard Deduction For Premium Payments

A temporary standard deduction of $150 for self-employed individual medical insurance payments, regardless of whether they are paid quarterly or semiannually, was in effect until 2008. If a self-employed individual (or an employee for whom a self-employed individual is responsible) has self-employed individual medical insurance premiums deducted from self-employment income, the $150 deduction shall be applied to the amount of the self-employed individual’s qualified health insurance premiums for that tax year. The remainder of the premium payment shall be deductible in computing the self-employed individual’s taxable income for that tax year.

While the temporary standard deduction for self-employed individuals has been in effect, no one has claimed a temporary standard deduction for health insurance premiums paid to self-employed individuals. The Department of Labor expects, however, that the temporary standard deduction will lead some individuals who have not previously been aware of the tax advantage of making ERC health insurance payments to consider making ERC health insurance premiums payments in the future.

Alimony and Other Life-Altering Qualified Long-Term Accrued Benefits

Qualified life-altering qualified long-term accrued benefits are defined as life insurance, annuities, and qualified pension and annuity income. Qualified life-altering qualified long-term accrued benefits are generally based on the use of the covered benefit plan by the covered beneficiary or beneficiary family members. Qualified life-altering qualified long-term accrued benefits include:

• Education expenses;
• Creditable travel expenses;
• Medical expenses not covered by medical insurance; and
• Taxable income amounts recorded in a taxpayer’s tax return that are subject to gross income limitations.

If the individual was the beneficiary of the qualified life-altering qualified long-term accrued benefit, and the individual (or a recipient of the benefits) is not married to the taxpayer, the self-employed individual, or the nonemployee co-employee, and the individual’s qualifying long-term accrued benefit was not awarded to the individual, the individual may include the amount of the qualified life-altering qualified long-term accrued benefit in computing adjusted gross income for that year.

If the individual was the recipient of the qualified life-altering qualified long-term accrued benefit, and the individual is married to the taxpayer, the self-employed individual, or the nonemployee co-employee, the taxpayer may, as a condition of their receiving the qualified life-altering qualified long-term accrued benefit, direct the recipient of the qualified life-altering qualified long-term accrued benefit to include the qualified life-altering qualified long-term accrued benefit in computing adjusted gross income for that year.

If the self-employed individual, the nonemployee co-employee, or the nonemployee co-employee received a qualified life-altering qualified long-term accrued benefit in a taxable year, and the self-employed individual, the nonemployee co-employee, or the nonemployee co-employee received a qualified life-altering qualified long-term accrued benefit in a taxable year, the nonemployee co-employee may not include the qualified life-altering qualified long-term accrued benefit in computing adjusted gross income for that year.

How To Apply for ERC Program?

There are two ways to apply for the EIC:

• Job Assistance Program (JAP)
• Individual Unemployment Income Credit (IUIC)

The application process for the JAP is quick and the program can be accessed by an employer. For the IUIC, the application process is time consuming and requires a lot of paperwork. In addition to the application, the employer must also complete the EIC reporting forms.

There are 4 stages of the IUIC. The first two stages are application and income verification. The employer must complete the form 35E and fill in the employee’s name, social security number, date of birth, sex, employment status, state of employment, date and duration of the last job, number of weeks worked and how many hours worked, household income, itemized deductions and debt owed.

The employer must also calculate the average weekly household income, which varies by state, based on the information provided by the employee. A Schedule B is also required with the IUIC. It contains the total amount of wages or salary paid by the employer to the employee during the qualifying period. The current total of wages or salary paid by the employer must be at least equal to 2 of the following items:

• 6 or more work weeks worked (this may include part-time workers)
• 10 to 12 hours per week or 25 to 30 hours per week

If any of the first three criteria are not met, the employer must provide an approved fact sheet to the state on what each of the five facts must be. The form 35B, if approved, will list the employee’s total number of weeks worked and the average salary or wages that were received by the employee in each week, or in the month.

The employer must complete the second stage of the IUIC. If the employer does not report the income within the 14-day time period, the IUIC will not be granted. Income verification also is completed by the employer for the IUIC, and this is done after the employer has completed the IUIC reporting forms.

You can find a complete list of criteria for each stage of the IUIC at IRS.gov.

What If Employee Retention Credit Program Has Been Repaid by Taxpayer?

For taxpayers who have received a payment under the employee retention credit program, the payments made to them under the program are not deductible on the taxpayer’s income tax return, but the employer must contribute to the self-employment tax. For the 2009 and 2010 tax years, a taxpayer who has previously received a payment from an employer under the employee retention credit program must satisfy three additional conditions to claim the tax credit. A taxpayer must first have qualified for the employee retention credit program, by having claimed on the taxpayer’s return at least one $3,000 payment under the program in A tax year, and must satisfy the three additional conditions.

The taxpayer must also File an amended tax return for the 2010 tax year. The amended tax return must include a tax credit claim for the payment made to the taxpayer. The amount of the credit claimed must equal the amount of the previous $3,000 payment made to the taxpayer under the program. If a taxpayer has already received an employee retention credit for a previous tax year, the amount of the employee retention credit paid to the taxpayer for that year is not required to be included on the taxpayer’s amended tax return.

If a taxpayer believes that the person who was supposed to make the employee retention payment in a previous year has not made the payment to the taxpayer, the taxpayer can apply to have that person make the employee retention payment. The taxpayer must file a separate application to request that a person make an employee retention payment. The application must identify the employee making the payment, the amount of the payment to be made, the specific tax year in which the payment must be made, and the amount of the payment that must be included on the taxpayer’s amended tax return. The IRS will determine if a request for a person to make the employee retention payment is correct. If the request for a person to make the payment is correct, the person making the payment will not be subject to penalties or interest.

What If The Program Is Not Exempt Under Certain Conditions?

Some payments made to an employee on an ERC basis are not tax deductible and are not subject to a deduction or credit under a specific condition. If the condition is not met, the taxpayer is not eligible to receive a tax credit under the program. It is important that the condition be fulfilled before any payments are made to the employee. Some ERC payments may be subject to income tax withholding at source or other tax reporting requirements under IRS regulations.

For example, if an employer makes an employee a qualified wage and benefit arrangement (QWB), an ERC, and certain tax and other laws and regulations permit such an arrangement to qualify for an exemption, then payments made to an employee on an ERC that are not tax deductible and are not subject to a deduction or credit under a specific condition cannot be counted as a tax deduction for that employee’s income tax return.

Why Is the Employee Retention Credit Not Eligible for Deduction for Certain Employees?

There are several reasons why the employee retention credit is not available for some employees.

Individuals may have tax-exempt or deductible business income from unrelated businesses, such as partnerships. If an employee is entitled to a tax-deductible business income exemption, the employee should receive an income tax form from his or her employer to identify his or her sources of business income and report the business income on his or her personal tax return.

The employee must also report the business income on his or her personal tax return. There are two types of business tax returns: return of business income and return of ordinary gain or loss. The personal tax return is the return of ordinary gain or loss, and the business tax return is the return of ordinary income. If a taxpayer has a second source of income from unrelated businesses, the individual must include that income on his or her personal tax return and report it on Schedule K-1.

The individual must also pay federal income taxes on the income and, if he or she has a net income from unrelated businesses, then the individual must include it on his or her personal tax return. If the employee is also eligible for a tax-exempt or deductible business income exemption, the ERC may not be applied for the tax years in which the employee has qualified for the exemption or a tax credit.

The individual must also make the contributions described in the regulations to a qualified retirement plan or an exempt employee compensation plan. The regulations make a special exception for the maximum contribution of $7,000 if the contributions are made in one or more of the following circumstances:

• Payment of an ERC must be made prior to a person’s retirement.
• Payment of an ERC may not be reduced by a reduction or exclusion of gross income.
• The employee has not previously made contributions to the qualified retirement plan or the exempt employee compensation plan, and contributions to these plans are made in connection with an employee’s employment.
• To qualify for the maximum ERC, an individual must be employed for at least 90 days. For non-qualified businesses, the 90-day period starts from the date of employment.
• If the employee’s unemployment benefits begin to accrue or are payable for at least 15 days from the date of hire, then the ERC must be made and paid during the 15-day period following the date of employment if that unemployment benefits accrue for up to 30 weeks and are payable for a maximum of 12 months from the date of hire.

Final Verdict

ERC Program is only applicable to the categories of qualified persons referred to in the IRC Section 1128(a) and the rules of the Internal Revenue Code. Many employers don’t know about the eligibility for ERC in their payroll system, and they are unaware of the Section 117A rules that are applicable to their employees. Section 117A generally applies to employers in the United States with 50 or more employees. Section 117B generally applies to employers in all other countries.

Benefits of ERC Program are not as significant as other tax benefits and deductions that are available to US individual taxpayers. Nevertheless, for some employees, ERC Program may provide an additional benefit, particularly if the employee has been claiming unemployment benefits or has been in the service of an employer who does not provide a paycheck at the end of the year.

My advice is, if you are currently receiving unemployment benefits and/or have been in the service of an employer that does not provide a paycheck at the end of the year, you should consider the ERC Program, especially if you are not eligible for unemployment benefits. If you are still planning to retire before the end of the year, then you may want to file an ERC just to give you additional incentive to collect enough income to meet your tax filing requirement.

If you are not planning to retire, but your employer is uncertain whether you are eligible for the ERC Program, it would be a good idea to speak with your payroll provider, or look up the FAQ section on IRS website, to see if you can determine whether you are eligible for ERCs. If you are eligible for ERCs, you can submit these required forms even though you are not technically unemployed.