Employee Retention Credit (ERC) overview
The Employee Retention Credit is a CARES Act relief measure for businesses. It is a fully refundable tax credit that eligible employers who are able to keep employees on payroll can claim.
An Eligible Employer may not receive the Employee Retention Credit if the Eligible Employer receives a PPP loan that is authorized under the CARES Act. An Eligible Employer that receives a PPP loan should not claim Employee Retention Credits.
Eligible Employers that are entitled to claim the Employee Retention Credit are private-sector businesses and tax-exempt organizations that carry on a trade or business during calendar year 2020 and either:
- Have operations that were fully or partially suspended during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Have experienced a significant decline in gross receipts during the calendar quarter. A significant decline in gross receipts begins with the first calendar quarter in 2020 in which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.
How much is the credit?
The refundable employee retention tax credit is equal to 50% of qualified wages eligible employers pay employees between March 13, 2020 through December 31, 2020.
The maximum credit per full-time employee for all calendar quarters is $5,000. This means the Employee Retention Credit maximum amount of qualified wages per employee for all calendar quarters is $10,000 ($10,000 in qualified wages X 50%).
Is the Employee Retention Credit available to employers of any size?
Yes. The number of employees an employer has does not affect whether it is an Eligible Employer that may claim the credit.
What are qualified wages?
Qualifying wages are the wages and compensations employers pay to employees during the time period. This includes qualified health plan expenses associated with said wages. Qualified health plan expenses are amounts paid or incurred by an Eligible Employer that are properly allocable to employees’ qualified wages to provide and maintain a group health plan, but only to the extent that these amounts are excluded from the employees’ gross income.
Another factor that determines qualified wages is the number of full-time equivalent (FTE) employees you had in 2019.
For employers who averaged fewer than 100 FTEs, the credit is based on wages you paid to all employees. The tax credit for employers who averaged more than 100 FTEs is based on wages paid to employees who did not work during the period.
Employers cannot claim the tax credit on FFCRA paid leave wages.
Who qualifies for the credit?
Only eligible employers qualify for the Employee Retention Credit program. Eligible employers include employers who:
- Have to fully or partially suspend operations during any quarter in 2020 due to the coronavirus; OR
- Experience a significant decline in gross receipts as a result of the coronavirus during any quarter in 2020 (e.g., drop below 50% of the comparable quarter amount in 2019)
Self-employed individuals cannot claim the ERC for their self-employment earnings or services.
How does the credit work?
The credit reduces your employer Social Security tax liability. If your credit winds up being more than your Social Security tax liability, you will get a refund from the IRS.
How do I claim the Employee Retention Credit?
There is no Employee Retention Credit application. Instead, employers can claim the Employee Retention Credit on their federal employment tax returns. In most cases, this means claiming the credits on Form 941, Employer’s Quarterly Federal Tax Return.
If your federal employment taxes don’t cover the payments, you can fill out Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request an advance of the credits. You can file the form multiple times during the quarter. File Form 7200 any time before the end of the month following the quarter in which you paid the qualified wages. If you file a quarterly Form 941, don’t forget to account for the advance amounts.
Is there an Employee Retention Credit deadline?
Again, employers can claim the ERC on qualifying wages paid between March 13, 2020 – December 31, 2020. Wages paid before March 13, 2020 or after December 31, 2020 do not qualify.
Can I claim the Employee Retention Credit in addition to another credit or loan?
Employers cannot claim both the Employee Retention Credit and the Paycheck Protection Program loan. You can only receive the Employee Retention Credit if you don’t receive and use the PPP loan. And, employers cannot receive the Employee Retention Credit after they receive a PPP loan and the loan is forgiven.
What about employers who repay the PPP loan by the safe harbor deadline(May 14, 2020)? Are they able to claim the ERC? Yes, employers that applied for a PPP loan, received the loan payment, and repay the loan (if required under new guidelines) by May 14 will be treated as if they did not receive a loan under the PPP. If this is the case, the employer would be able to claim the ERC if they’re eligible for it.
How to calculate Employee Retention Credit: Examples
Say you have one employee and you pay them $5,000 in qualified wages. As an employer, you would get a credit of $2,500 ($5,000 X 50%).
One employee with health plan expenses
Now, let’s say you pay your one employee $5,000 in qualified wages and also provide them $1,000 of qualified employee health insurance. Add your qualified wages and employee health insurance together and multiply the total by 50%. Your total credit would equal $3,000 [($5,000 + $1,000) X 50%].
What other coronavirus tax credits are available?
In addition to the Employee Retention Credit, the Families First Coronavirus Response Act (FFCRA) established the COVID-19 tax credits. The COVID-19 tax credits help employers afford the coronavirus-related paid sick and family leave required by the FFCRA.
There is both a refundable paid sick leave credit and a refundable paid family leave credit. Both leave credits reimburse employers for the cost of providing paid leave.
Again, you can take both the Employee Retention Credit and paid leave credit, but you cannot claim both credits on the same wages.
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