ERC extension alert! The American Rescue Plan (signed into law on March 11, 2021) expands and extends the Employee Retention Credit. This article was updated to include information about ERC changes under the new plan, including changes applicable to Quarters 3 and 4 of 2021.
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.
Check out more information about this tax credit option by exploring the Employee Retention Credit Q&As below.
How much is the 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 paid through December 31, 2021. The amount of qualified wages for the credit is now $10,000 per employee per quarter for the first two quarters of 2021.
The maximum credit per full-time employee per quarter is $7,000. This means the ERC maximum credit amount per employee for the first two quarters of 2021 is $14,000 ($10,000 in qualified wages per employee per quarter X 70% X 2 quarters).
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?
Only eligible employers qualify for the Employee Retention Credit program. Eligible employers include employers who:
- Have to fully or partially suspend operations due to COVID-19 government order (only during the period the order is in force); OR
- Experience a significant decline in gross receipts as a result of the coronavirus
- Impacted by forced closures or quarantines and have seen more than 20% drop in gross receipts in the quarter compared to the same quarter in 2019
The American Rescue Plan also expands eligibility for the credit to:
- New startups that were established after February 15, 2020 with annual gross receipts of up to $1 million
- Credit capped at $50,000 per calendar quarter for startups
- Businesses that experienced a revenue decline of 90% or more (compared to the same calendar quarter of the previous year)
Businesses that were not in existence in 2019 may use a 2020 comparison for the credit.
Self-employed individuals cannot claim the ERC for their self-employment earnings or services.
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.
Are you a Patriot Full Service Payroll customer? If so, here’s how to take the Employee Retention Tax Credit in Patriot Software.
Is there an Employee Retention Credit deadline?
Again, employers can claim the ERC on qualifying wages through December 31, 2021. Wages paid before March 13, 2020 or after December 31, 2021 do not qualify.
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.
Employers can claim both the Employee Retention Credit and FFCRA paid leave credits. However, you cannot claim both credits on the same wages.
Want to learn more about the PPP? Check out our PPP Resources Guide for more information on the relief program and how to take out a PPP loan.
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.
The ERC for Quarters 3 and 4 of 2021
The IRS provided some additional guidance and updates for employers who pay qualified wages after June 30, 2021 and before January 1, 2022. In the notice, the IRS addresses changes made to ERC by the American Rescue Plan that are applicable for Quarters 3 and 4 of 2021. Changes include:
- Making the credit available to eligible employers who pay qualified wages after June 30, 2021 and before January 1, 2022
- Expanding the definition of eligible employer to include recovery startup businesses
- Modifying the definition of qualified wages for severely financially distressed employers
- Providing that the ERC does not apply to qualified wages taken into account as payroll costs in connection with a shuttered venue grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or a restaurant revitalization grant under section 5003 of the ARP
The notice also provides insight into other ERC questions and issues, such as:
- The definition of full-time employee and whether that definition includes full-time equivalents
- The treatment of tips as qualified wages and the interaction with the section 45B credit
- The timing of the qualified wages deduction disallowance and whether taxpayers that already filed an income tax return must amend that return after claiming the credit on an adjusted employment tax return
- Whether wages paid to majority owners and their spouses may be treated as qualified wages
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.