Over the past year, the government has passed multiple tax breaks for businesses due to the COVID-19 pandemic. Now, lawmakers are encouraging those businesses hit the hardest to take advantage of one large tax break, the Employee Retention Credit.

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The ERC was first created in March 2020 as part of the CARES Act and has been expanded since the December relief package and the American Rescue Plan Act in March. More than 30,000 businesses have claimed over 1 billion dollars through the ERC this year, according to the Biden Administration. Here’s what businesses need to know when looking to benefit from the Employee Retention Credit. 

How the ERC works

The Employee Retention Credit allows employers of small businesses to take a 70 percent tax credit up to 10,000 dollars of an employee’s qualifying wage per quarter for 2021. The maximum credit amount per quarter is capped at 7,000 dollars per employee. For 2020 the refundable credit is a 50 percent tax credit up to 5,000 dollars of an employee’s qualifying wage for the entire year.

The ERC also lowers your employer Social Security tax liability. If the credit received through the ERC exceeds your Social Security tax liability, then you will get a refund. 

What are qualified wages?

Compensation and wages employers paid to employees during 2020 are qualifying wages. These wages also include health plan expenses associated with each employee. The number of full-time employees is another determining factor in calculating qualified wages. 

Employers with less than 500 employees are eligible for the ERC, even if the employees continued to work. Employers with fewer than 500 employees can advance the credit at any time during the quarter based on 70 percent payroll for the same quarter the previous year.

Employers with 500 or more full-time employees in 2019 can claim credit for wages paid while the employee was not working due to the pandemic. 

Who qualifies for the ERC?

Only certain employers are eligible for the ERC. Those eligible includes:

• Employers who had to stop operations fully or partially due to COVID-19 government orders.

• Employers who had a significant decline in gross receipts caused by COVID-19 in 2020 or 2021; these declines are different for each year.

The American Rescue Plan expanded those eligible for the Employee Retention Credit to:

• New businesses that were established after February 15, 2020, with annual gross receipts of up to 1 million dollars.

• Businesses that experienced a decline in revenue of 90 percent or more compared to the same quarter from the previous year.

Self-employed individuals cannot claim the Employee Retention Credit for self-employment earnings. 

How to claim the ERC?

Employers can claim the Employee Retention Credit on their federal employment tax returns. This means claiming the credit on Form 941, Employer’s Quarterly Federal Tax Return. An employer can amend their Employer’s Quarterly Federal Tax Return on Form 941-X if they determine later that they qualified for the ERC. 

Depending on your business, you may also be able to claim the credit on Form 944, Employer’s Annual Federal Tax Return, or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees.

If your federal employment taxes don’t cover the payments, employers need to fill out Form 7200, Advance Payment of Employer Credits Due to Covid-19, to request an advance. You must file Form 7200 any time before the end of the month following the quarter where you paid the qualified wages. When filing Form 941, 944, or 943, don’t forget to account for the advance amounts

Understanding the Employee Retention Credit can be complicated, so it is suggested you consult with your tax advisor if you have any questions when deciding to file. 

Note: The Information in this article is intended to be general in education, not tax advice. Consult with your tax advisor to determine the best strategy for your specific needs.

 

Author: Barry Friefield is a Certified Public Accountant and a Chartered Global Management Accountant with Epstein Schneider, PLC in Phoenix, Ariz. He is a member of the Arizona Society of Certified Public Accountants and an active member of the American Institute of Certified Public Accountants.