What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable tax credit that businesses can claim on qualified wages, including certain health insurance costs, paid to employees. This credit, passed under the CARES Act, encourages businesses to keep employees on their payroll. The refundable tax credit is 70% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. Employers can claim up to $5,000 in refundable tax credits for each employee on their payroll in 2020 and up to a $7,000 credit per quarter (excluding Q4) for each employee in 2021.
After the passing of the Infrastructure Investment and Jobs Act on Nov. 15, the end date for the program retroactively changed to September 30, 2021. Even though the program has ended, this does not mean the end for businesses to claim the credit. Businesses have three years to conduct a lookback to determine if wages they paid after March 12, 2020, through the end of the program are eligible.
Who is Eligible?
The ERC is available to any trade or business, as identified by the Internal Revenue Code. Most employers, including colleges, hospitals, and 501(c) organizations can qualify for the credit. Qualification is determined by one of two criteria for eligible employers. Note, one of these two criteria must apply in the calendar quarter the employer wishes to utilize the credit:
- A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
- An employer that has a significant decline in gross receipts by more than 50% in 2020 and 80% in 2021 versus that of 2019.
Recent Changes to the Employee Retention Credit
The IRS has provided additional guidance for taxpayers to use when preparing credit claims and explains the changes made to the employee retention credit for the first two calendar quarters of 2021. These changes included:
Broadened Eligibility Requirements
- Employers who suffered a 20% decline in quarterly gross receipts compared to the same calendar quarter in 2019 are now eligible.
- A safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility.
- Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.
Determination of Qualified Wages
- Employers with 500 or fewer full-time employees in 2019 may include all wages and health plan expenses as “qualified wages.”
- The Relief Act strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).
- Employers with fewer than 500 full-time employees will be allowed advance payments of the ERC during a calendar quarter in which qualifying wages are paid. Special rules for advance payments are included for seasonal employers and employers that were not in existence in 2019.
How to Claim the ERC Retroactively?
In order for employers to retroactively claim the credit for previous quarters, they must file the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the applicable quarter(s) in which the qualified wages were paid. The credit is taken against the employer’s share of Social Security tax, but the excess is refundable under normal procedures.
If you want to learn more about the Employee Retention Credit and or find out if you can retroactively claim the benefit, get your free assessment from one of you a tax professional today.