Heads up: Congress recently passed the Infrastructure Investment and Jobs Act, which President Biden signed on November 15, 2021. The new expiration date of the ERTC is September 30, 2021 for most businesses, and the IRS has provided guidance on failure to deposit penalties.
Due to the coronavirus negatively affecting businesses nationwide, there are a number of coronavirus payroll tax credits available to help employers out. One option for employers is the Employee Retention Credit (ERC). Read on to learn the ins and outs of the ERC, including how the Employee Retention Credit works and how it can help you rebound from the COVID-19 pandemic.
Employee Retention Credit 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.
The Consolidated Appropriations Act (CAA or the Act) also expanded the Employee Retention Credit in December 2020. The Infrastructure Investment and Jobs Act ended the ERC retroactively on September 30, 2021 for most employers.
Check out more information about this tax credit option by exploring the Employee Retention Credit Q&As below.
How much is the employee tax credit?
When signed into law under the CARES Act, the refundable Employee Retention Tax Credit was equal to 50% of qualified wages eligible employers paid employees between March 13, 2020 through December 31, 2020.
But thanks to the CAA, employers who qualify in 2021 (including employers who received a PPP loan) can now claim a credit against 70% of qualified wages. The amount of qualified wages for the credit is now $10,000 per employee per quarter for 2021.
The maximum credit per full-time employee per quarter is $7,000 ($10,000 in qualified wages per employee per quarter X 70%).
The Infrastructure Investment and Jobs Act signed in November 2021 changed the ERTC deadline from December 31, 2021 to September 30, 2021 for most businesses.
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.
Another factor that determines qualified wages is the number of full-time equivalent (FTE) employees you had in 2019.
In 2020, employers with fewer than 100 FTE employees in 2019 could claim the ERC on all wages paid to employees during a qualified period (e.g., shutdown period).
The Act increased the small employer threshold from 100 FTE employees to 500. Employers with up to 500 FTE employees in 2019 can claim the ERC for 2021 on wages paid for working or non-working periods.
An employer with fewer than 500 employees is eligible for the credit, even if employees are working. Businesses with 500 or fewer employees can also advance the credit anytime during the quarter based on 70% of average quarterly payroll for the same quarter in 2019.
Employers with more than 500 full-time equivalent employees in 2019 may claim the credit only for wages paid to an employee while the employee is not performing services for the employer.
Who qualifies for the credit?
Because of the Infrastructure Investment and Jobs Act, only Recovery Startup Businesses can take advantage of the credit until December 31, 2021. As a reminder, a Recovery Startup Business is an employer that began operations on or after February 15, 2020, and has average annual gross receipts under $1 million.
How does the credit work?
The small business Employee Retention Credit lets employers take a 70% credit up to $10,000 of an employee’s qualifying wages per quarter. Again, the maximum credit amount per employee per quarter is $7,000.
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 Tax 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.
An employer can amend their Form 941 if they determine later that they qualified for the credit.
Depending on your business, you might also claim the credit on Form 944, Employer’s Annual Federal Tax Return, or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees.
Report the total qualifying leave wages on your federal employment 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. File Form 7200 any time before the end of the month following the quarter in which you paid the qualified wages. If you file Form 941, 944, or 943, don’t forget to account for the advance amounts.
According to the IRS, Form 7200 may be filed to request an advance payment for the ERC through August 2, 2021. And, new businesses formed after December 31, 2020 cannot file Form 7200 to apply for an advance payment of the Employee Retention Credit.
Is there an Employee Retention Credit deadline?
The ERC ended retroactively for most employers on September 30, 2021.
Companies that are considered a Recovery Startup Business can still take advantage of the credit through the remainder of 2021.
Can I claim the Employee Retention Credit in addition to another credit or loan?
Before the CAA, employers could not claim the ERC and take out a Paycheck Protection Program loan. Now, employers can take the ERC and participate in the PPP.
Eligible employers can claim both the Employee Retention Credit and FFCRA paid leave credits. However, you cannot claim both credits on the same wages.
Failure to deposit penalties and the ERC
The Employee Retention Credit ending retroactively caused a lot of confusion and concern for penalties for business owners and accountants alike. To clear up any uncertainty about ERC-related penalties, the IRS addressed the penalty issue in Notice 2021-65.
Employers who reduced deposits on or before December 20, 2021, for wages paid during the fourth quarter of 2021 in anticipation of the ERC and are not a Recovery Startup Business will not be subject to the failure to deposit penalty if they did all of the following:
- Reduced deposits in anticipation of the Employee Retention Credit, consistent with the rules in Notice 2021-24
- Deposited the amounts initially retained in anticipation of the ERC on or before the due date for wages paid on December 31, 2021 (deposit due dates vary depending on your deposit schedule)
- Reported the tax liability resulting from the termination of the employer’s Employee Retention Credit on the applicable employment tax return or schedule that includes the period October 1, 2021 – December 31, 2021
If you reduce deposits after December 20, 2021, the failure to deposit penalties will not be waived.
For more information on the IRS’s guidance, check out Notice 2021-65 and the IRS’s news release. If you do not qualify for relief under the notice, you can respond to the IRS penalty notice to try to get reasonable cause relief.
What else do I need to know about the credit?
The tax credit is not mandatory. Eligible employers may opt not to claim the Employee Retention Credit.
To learn more about the Employee Retention Credit for employers, check out the IRS’s website.
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How to calculate Employee Retention Credit: Examples
As a reminder, employers can receive a maximum ERC of $7,000 per employee per quarter in 2021. Credits are worth 70% of qualifying wages and associated qualified health plan expenses paid to employees. Let’s take a look at a few Employee Retention Credit examples.
Say you have one employee and you pay them $10,000 in qualified wages in Quarter 1 of 2021. As an employer, you would get a credit of $7,000 ($10,000 X 70%).
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 in one quarter. Add your qualified wages and employee health insurance together and multiply the total by 70%. Your total credit would equal $4,200 [($5,000 + $1,000) X 70%].
Say you have three employees. You pay two out of your three employees $10,000 in qualified wages during the quarter, and you pay the third employee $20,000 in qualified wages. Because the maximum is $10,000 in qualified wages per employee per quarter, your credit would be $21,000 ($7,000 X 3 employees).
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 under 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.
As of January 1, 2021, FFCRA paid leave benefits are no longer mandatory. But, employers who voluntarily continue providing the paid leave to employees can claim the FFCRA tax credit until September 30, 2021.
This article has been updated from its original publication date of May 12, 2020.
This is not intended as legal advice; for more information, please click here.