Employee Retention Credit Updates You Need to Know
A lot of confusion still exists surrounding who is eligible to claim the employee retention credit (ERC) and who isn’t. Luckily, the IRS released new guidance earlier this week regarding ERC to clarify retroactive changes made to the credit for the 2020 tax year and explain how employers who received a Paycheck Protection Program (PPP) loan may claim it. Those that held off on the PPP forgiveness application will most easily maximize the ERC if they qualify while those that already filed for PPP forgiveness and received confirmation of forgiveness will still benefit but must analyze how their application was filed.
First of all, what is the ERC and how much savings are we talking?
The ERC is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including qualified health plan expenses) that eligible employers pay their employees. This credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000 so the maximum credit for qualified wages paid to any employee is $5,000.
Does my business qualify based on the latest guidelines?
For 2020, the ERC can be claimed by employers who experienced a full or partial suspension of their operations or a significant decline in gross receipts. It is taxable via a reduction to wages (not payroll tax expenses) for the amount of the credit received. Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:
- the full or partial suspension of the operation of trade or business during any calendar quarter because of governmental orders limiting commerce, travel or meetings due to COVID-19, or
- a significant decline in gross receipts:
- begins on the first day of the first calendar quarter of 2020, for which an employer’s gross receipts are less than 50% of its gross receipts, for the same calendar quarter in 2019
- the decline in gross receipts ends on the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than of 80% of its gross receipts for the same calendar quarter in 2019
What kind of documentation should I have ready to claim this credit?
- Any government order to suspend the employer’s business operations
- Records that shows different lines of business (essential and non-essential) and revenues generated by each line when you are claiming partially or fully suspended business activity
- Records showing a significant decline in gross receipts
- Records showing employee qualified wages
- Records showing qualified health plan expenses allocated to qualified wages
What if I am still confused about this process, and don’t understand if my business qualifies?
We understand this is a complex process and there are a lot of factors to be considered. It’s crucial that you carefully review the FAQ page issued by the IRS, which you can find here. We also highly encourage you to reach out to your accounting and tax professionals for further guidance.
Don’t Miss Out On a Huge Credit
Monday, December 21st, 2020, Congress passed the Consolidated Appropriations Act of 2021 (the Act) which included several enhancements to the Employee Retention Credit (ERC). The most prominent change is that businesses that received a loan pursuant to the Paycheck Protection Program (PPP) are now eligible for the ERC.
The ERC is designed to encourage businesses to retain their full-time employees through the pandemic and is a fully refundable tax credit for companies experiencing severe business disruptions due to COVID-19. The ERC can result in a substantial financial benefit for organizations. Initially set to expire on December 31st, the ERC is now available for wages paid through July 1, 2021. Under the new legislation, ERC has been expanded and modified for calendar quarters beginning after December 31, 2020. Employers can receive up to $7,000 per full-time employee (FTE) per quarter in ERC – an increase from $5,000 per employee for all of 2020. Companies should claim ERC on their quarterly Form 941, Employer’s Quarterly Federal Tax Return.
Who is an Eligible Employer
The first step in determining whether your company can take advantage of the ERC is to ascertain whether your company is an “Eligible Employer” as defined by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In order to meet the definition of Eligible Employer, your company must have experienced one of the following:
Business was either fully or partially suspended due to orders from the federal government, or a state government having jurisdiction over the employer, limiting commerce, travel, or group meetings due to COVID-19; or, Business experienced significant decline in gross receipts – Under the new legislation, which is effective for calendar quarters beginning after December 31, 2020, a significant decline occurs when an employer’s gross receipts decline by 20% of what they were for the same calendar quarter in 2019 (changed from 50%).
While a company may not have been required to close due to direct orders, a company could be deemed as “partially suspended” when they may not be operating at “normal capacity” due to imposed restrictions from a government authority that limits commerce, travel, or group meetings.
Additionally, a government order imposed on a member of your company’s supply chain could have resulted in your company not operating at normal capacity if the business became unable to acquire needed materials and supplies required to provide full service to customers. Thus, a company may be an Eligible Employer for purposes of the ERC from both direct and indirect causes.
Calculating the Credit Based on Qualifying Wages
Once it is determined that your company meets the Eligible Employer definition, the next step in the analysis is to determine the “Qualified Wages” that your company paid. The Qualified Wages form the basis of the ERC amount a company can claim. Under the new legislation, which is effective for calendar quarters beginning after December 31, 2020, the determination of Qualified Wages is different depending upon whether your company has 500 employees or more (increased from 100 employees).
More than 500 employees – If your company has more than 500 employees, the credit is available only for compensation paid to employees who are not working as a result of one of the two situations listed above.
Fewer than 500 employees – If your company has 500 or fewer employees, any compensation paid during the period when the operations were affected by one of the two scenarios above is eligible for the credit, whether the employees were working or not. Some analysis must be done to properly determine the number of employees a company employs for purposes of the 500 employee threshold.
Regarding timing, Qualified Wages are compensation provided to an employee after March 12, 2020 and before July 1, 2021 (extended from January 1, 2021), and may also include the Eligible Employer’s qualified health plan expenses that are allocable to the wages. A company may not double benefit from claimed credits based on the same wages for purposes of the ERC, the PPP forgiveness determination and other wage-based tax credits. Wages used in calculating paid sick and family leave credits under the Families First Coronavirus Response Act (FFCRA) may not also be considered Qualified Wages for purposes of the ERC. In addition, employers may not use the same wages for a Work Opportunity Tax Credit (WOTC) calculation and in determining the amount of an ERC.
As previously stated, Eligible Employers can claim an ERC for 70%, for calendar quarters beginning after December 31, 2020, (increased from 50%) of Qualified Wages paid to employees after March 12, 2020 and before July 1, 2021. The maximum amount of wages which can be considered for the ERC is $10,000 per employee per quarter. Employers can claim a maximum ERC of $7,000 per employee per quarter through the second quarter of 2021.
How to Claim the ERC
An Eligible Employer claims the ERC is by reducing a quarter’s required payroll tax deposits on its Form 941. Initially, the ERC is applied against the 6.2% employer’s share of social security taxes due on all wages paid to all employees for the quarter. If an ERC is more than that amount, the ERC may offset against the rest of the payroll tax liabilities on Form 941 for the quarter.
If the ERC exceeds all payroll tax liabilities, the company may receive a refund. If a company determines that it was an Eligible Employer for a previous quarter, and has already filed its Form 941 for that quarter without claiming an ERC, the company may file a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the quarter in question to claim the credit.
Courtesy of RBT CPAs, Newburgh NY. For more information call 845-567-9000 or visit www.rbtcpas.com