The Employee Retention Credit: Everything You Need to Know

The employee retention tax credit update is a refundable payroll tax credit for "qualified wages" paid to retained full-time employees from March 13, 2020, to December 31, 2020, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The ERC was designed to encourage firms to keep people on the payroll even if they weren't working during the COVID-19 period.

The ERC was expanded further under both the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act, and is now available to qualifying firms who kept staff during the pandemic until December 31, 2021.

What is the Employee Retention Credit, and how does it work?

The ERC is a refundable credit that firms can claim on eligible salaries provided to employees, including certain health-care costs.

The CARES Act is set to expire in 2020.

The credit can be used to 50% of eligible salaries earned between March 13 and December 31, 2020, up to $10,000 per employee per year, for employers who qualify, including first-time PPP recipients.

2021 Consolidated Appropriations Act

Employers who meet the requirements, including PPP participants, can claim a credit of 70% of eligible salaries paid. In addition, during the first two quarters of 2021, the wage amount that qualifies for the credit has been increased to $10,000 per employee per quarter.

2021 American Rescue Plan Act

The credit stays at 70% of qualifying wages up to a $10,000 cap per quarter, equating to a maximum of $7,000 per employee per quarter or $28,000 for the entire year of 2021. Certain startup enterprises that started after Feb. 15, 2020 and were forced to close due to government order may be eligible for a credit of up to $50,000 per quarter under this statute.

What Companies Are Eligible for the Employee Retention Credit?

Most companies, including colleges, universities, hospitals, and 501(c)(3) organizations, can now qualify for the credit as a result of the enactment of the American Rescue Plan Act. The Consolidated Appropriations Act previously broadened eligibility to include enterprises that obtained a PPP loan, including borrowers from the first round of PPP who were previously ineligible to claim the tax credit.

For eligible employers, one of two factors determines qualification, and one of these factors must apply in the calendar quarter in which the credit is to be used:

Due to a government order, trade or business was completely or partially halted or had to reduce operating hours. The credit is only valid for the portion of the quarter in which the business is closed, not for the entire quarter.

Gross receipts have decreased significantly for the employer.

The CARES Act is set to expire in 2020.

In general, an employer qualifies if gross receipts in a calendar quarter are less than 50% of gross receipts in the same calendar quarter in 2019. If their quarter gross receipts exceed 80% in the following calendar quarter compared to the same calendar quarter in 2019, they are no longer eligible, employee retention tax credit in new stimulus bill.

The 2021 Consolidated Appropriations Act

Beginning in 2021, firms must have been impacted by forced closures or quarantines, or have suffered a 20% decline in gross receipts in the previous quarter compared to the previous quarter in 2019.

If you're a new business, the IRS allows you to use gross receipts from the first quarter of operation as a reference for any quarter for which they don't have 2019 figures because you weren't yet in operation.

2021 American Rescue Plan Act

Businesses can also determine eligibility based on gross receipts in the preceding calendar quarter, in addition to the eligibility conditions set forth in the Consolidated Appropriations Act 2021. (compared with the corresponding quarter in 2019).

Note that members of controlled or affiliated service groups are treated as a single employer, so gross receipts must be aggregated to see if they qualify.

What wages are eligible for the retention credit?

When computing the employee retention credit, wages/compensation that are subject to FICA taxes, as well as eligible health expenses, are often considered. These must have been paid after March 12, 2020, and must be paid by December 31, 2021 to qualify for the credit. Remember that the credit can only be used on wages that aren't forgiven or expected to be forgiven under PPP, and it can't be used for any other forms of credits based on wages.

Qualified health expenses normally include the pretax share paid by the employer and the employee, but not any after-tax amounts. In addition, a business must first determine the number of full-time employees before determining the eligible earnings that can be included.

A full-time employee is defined as one who worked at least 30 hours per week or 130 hours per month in any calendar month in 2019 for the purposes of the employee retention credit, which is based on the ACA's employer shared responsibility clause.

Employers who were open for business for the entire calendar year in 2019 or 2020 would divide the total number of full-time employees by 12 to get the total number of full-time employees.

The number of full-time employees is calculated by adding the number of full-time employees in each full calendar month in 2019 or 2020 in which the business operated and dividing by the number of months.

An employer who established a firm in 2021 calculates the number of full-time employees by multiplying the total number of full-time employees in each complete calendar month in 2021 by the number of months in the year.

Note that the employee full-time equivalent (FTE) computation used for the PPP forgiveness report is not the same as the full-time employee calculation used for the employee retention credit.

The CARES Act is set to expire in 2020.

Only eligible salaries of employees who are not providing services due to a suspension or fall in business can be used by employers with more than 100 full-time employees. Furthermore, for bigger businesses, any wages received for vacation, sick, or other days off depending on the employer's present policy cannot be included in qualifying wages. Employers can only use this credit on employees who are currently unemployed.

With the exception of paid leave allowed under the Families First Coronavirus Response Act, employers with 100 or less full-time employees can use all employee salaries — those working as well as any time earned without being at work.

2021 Consolidated Appropriations Act

The employee limit for determining whether earnings are eligible for the credit was raised to 500 by this statute.

2021 American Rescue Plan Act

This statute allows some enterprises that have been struck the worst to claim the credit against all qualified earnings, not just those who are not delivering services. In order to qualify for the credit in 2021, an organization's gross receipts must be less than 80% of what they were in the same quarter last year.It is worth noting

There is no credit double-dipping. Employers who accept the employee retention credit are unable to take credit for paid family medical leave on the same eligible salaries.

Employee earnings may not be used to calculate the Work Opportunity Tax Credit or the Employee Retention Credit if they are used to calculate the Work Opportunity Tax Credit.

As a result, employers deciding which credits to take should examine which is more financially beneficial to their company.

How Can a Company Claim the Employee Retention Tax Credit Backwards?

The IRS released Notice 2021-20 on March 1, 2021, which provides instructions for employers claiming the Employee Retention Tax Credit, including how employers who received a PPP loan can claim the employee retention tax credit retroactively. Employers must file Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for the pertinent quarter(s) in which the eligible wages were paid in order to claim the credit for previous quarters. To demonstrate the method, the IRS provides three instances (Q&A No. 57).

What is the process for a PEO client employer to reconcile their accounts?

Employers who use a Professional Employer Organization (PEO) or a Certified Professional Employer Organization (CPEO) do not have a 941 filed on their behalf, thus they must learn how to reconcile this information and collect the credit. The Internal Revenue Service (IRS) issued instructions to explain how it would work.

The retention credit is reported on the PEO/CPEO aggerate Form 941 and Schedule R if a qualified company hires a PEO or CPEO.