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Employee Retention Tax Credit: Explained By The IRS Guide

Small businesses constitute around 99.9% in the US. Almost half of the private workforce are these business employees of the small business. Unfortunately, this sector got hit during the pandemic, which has caused a drastic impact on the employers and the employees. It started way back in 2019, and many continue to struggle because of the corona virus. To counter this and soothe the employers’ dilemma, then US President Donald Trump made the CARES Act into a fully-fledged law on March 27, 2020, and this CARES act includes the employee retention tax credit IRS guidance. The Employee Retention Credit (ERC) is an economic relief initiated to help businesses throughout the pandemic. As the name suggests, it’s a refundable tax credit against certain employment taxes to help keep employees on the payroll. Want to know if your business qualifies for the ERC? Read further to know more.

Know The Employee Retention Credit 

The lawmakers have designed the employee retention credit to give qualified employers access to the credit by reducing the employment tax deposits they usually have to make. On the qualified wages, the credit equals up to 50% of the wages paid between March 12, 2020, and January 1, 2021.

The wages up to $10,000 per employee for all the calendars are covered in the employee retention credit. Furthermore, this also includes allocable qualified health plan expenses. This means that the businesses can claim $5,000 in tax credits per employee for these dates. 

Latest Employee Retention Tax Credit Updates 

After President Donald Trump, US President Joe Biden extended the ERC in 2021 following the Consolidated Appropriations Act. This extension covers January 1, 2021, to June 30, 2021, or the first two quarters of 2021. Employers now can claim a credit of up to 70% of qualified wages paid. Another significant change is the $10,000 credit which changed from the calendar year to quarter. The consolidated appropriations act allows businesses that have received the Paycheck Protection Program (PPP) from march 2020 to December 2020 to qualify for the ERC. However, if the small businesses didn’t pay wages with their PPP loan, they can apply for the employee retention credit.

This law further considers the group healthcare expenses as qualified wages if no other wagers are paid to the employee. The American Rescue Plan Act again extended the ERC until January 1, 2022. The Infrastructure Investment and Jobs Act deserted the credit for the fourth quarter of 2021. This, however, terminates the ERC on September 30, 2021.

With this change, the employees can now claim up to $7,000 per employee for the first three quarters of 2021. The total is now $21,000, and the Recovery Startup Business Program falls under the category of the ERC. The program covers the businesses started after February 15, 2020. Such businesses can still receive tax credits throughout the year 2021. In addition, the employee retention tax credit updates offers qualified startup businesses $50,000 for the third and fourth quarters of 2021. 

Know The Employee Retention Credit Eligibility

The qualified wages are the wages and the compensation employers had to pay to the employees during the specific period of March 12, 2020, to January 1, 2021, and another from January 1, 2021, to June 30, 2021. The employee retention credit includes wages that are subjected to FICA taxes. Also, remember that the wages paid by the businesses using the PPP loan may find these wages ineligible. 

As mentioned above, it also includes health plan expenses associated with these wages. The qualified health expenses are calculated using several ways. First, the calculation may include the employer and the employee’s pre-tax portion. 

Qualified Wages: Full-Time Employees 

The Full-Time Equivalent Employees business is another element that defined the qualified wages way back in 2019. The time employees are the ones who worked at least 30 hours per week in any month in 2019. It also includes the employees who worked at least 130 hours in a month in 2019. 

The CARES retention credit explicitly calculates the FTE employees. One important thing to understand here is that it is not the same as the PPP forgiveness report. Employers with fewer than 100 FTE employees in 2019 could claim the ERC under the CARES act on all wages during the qualifying period. 

The Consolidated Appropriations Act increased the number of full-time employees to 500. The business can claim the Employee Retention Credit for 2021 on the wages paid during working and non-working periods. In 2019 businesses with more than 500 full-time employees can claim the credit only for the wages to employees while the employees were not working.

Can Your Business Qualify For The Employee Retention Tax Credit? 

With the passing of the American Rescue Plan Act, most employers can qualify for the employee retention tax credit. In addition to this, the Consolidated Appropriations Act extended the qualifications for the businesses that took out a loan under the PPP. The employers who want to use the ERC have to consider the two main factors:

  • The businesses that were fully or partially shut down during the calendar quarter want to apply. 
  • The credit applies to the portion of the quarter in which the business was suspended.

Furthermore, the businesses whose gross receipts fell below 50% for the quarter in the year 2019 and below 80% can also qualify. The startup businesses under the Recovery Startup Business program must incorporate the average annual gross receipts under $1 mn.

Apply For The Employee Retention Credit Now  

Form 941 is the only way of claiming employee retention credit. By this form, the employers can claim the credit on their federal employment tax returns. Form 941 is the employer’s quarterly federal tax return form. If the employers qualify for the tax credit, they can further amend these forms, which is excellent news for the businesses. 

On form 944, some businesses can also claim the tax credit. This form is the employer’s annual federal tax return for agricultural employees. Another form, 7200, is available for businesses whose federal employment taxes do not cover the payments. This is the advance payment of employer credits due to the Covid-19 form. It is essential to note the businesses formed after December 31, 2020, cannot file the form 7200.

Get The Pandemic Relief With CPA Due Diligence

Across the country, employee retention tax credit updates offer a tremendous amount of relief to small businesses. However, it is challenging to know which companies and wages can qualify with changing extensions and regulations. 

We hope that this blog answers some of your doubts and queries associated with the ERC, but still, if you have questions about how to get the ERC for your business, then CPA Due Diligence is always here to help you. Our professional advisors offer expert services and 100% IRS compliance to get your business the required funds it needs. 

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