There are many questions surrounding the Employee Retention Tax Credit (ERC). Many companies understand the benefits, but several changes, requirements, qualifications, etc., can seem confusing.
Today we will try and simplify this complicated subject and provide you with a guide to the ERC, including how the ERC works, wage qualifications, how to claim this tax credit, and the changes that have taken place in the past two years.
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Table of Contents
What is the Employee Retention Credit (ERC)?
The Employee Retention Tax Credit was initially designed as a relief package by the IRS to help businesses when Covid-19 swept the nation. The ERC was created within the Coronavirus Aid Relief Act and was designed to help employers keep their employees on the payroll as they navigated through the ups and downs of the Covid-19 business environment.
Employers that are eligible can get their payroll tax credit refunded to them equal to a percentage of the wages that are eligible. Medical, dental, and visionHealth insurance costs the company pays employees are also covered under the ERC.
In the beginning, employers could not obtain a PPP loan and claim the Employee Retention Credit simultaneously. This all changed with the Consolidated Appropriations Act when it started to allow eligible employers to claim the ERC even though they had also received a PPP loan.
Related Links: How To Calculate The ERC Tax Credit [Guide & Calculator]
How Does The ERC Work?
Let’s look at how the Employee Retention Tax Credit works for employers.
Most employers can qualify for the ERC thanks to the American Rescue Plan Act.
The employer must have done business during the calendar year of 2020 or 2021 to be eligible. This includes tax-exempt organizations that meet the following two conditions:
- The business was partially or fully suspended due to government orders due to Covid 19.
- For 2020, if the business experienced a significant decrease (more than 50%) in sales or gross receipts when compared to the same calendar quarter of the previous year. For 2021, if sales decreased by 20 percent in any quarter when compared to 2019.
The definition of gross receipts includes all the receipts that the business received when doing business.
In order for wages to qualify, the FICA taxes and qualified health expenses must have been paid after March 12th, 2020, and qualify for the credit if paid through September 30th, 2021. If you fall into the Recovery Startup Business category, you have until December 31st, 2021.
Note that the ERC can only be claimed on wages that are not forgiven under PPP.
There are several ways that the IRS can calculate and determine what the qualified health expenses should be. Typically, they don’t include after-tax amounts and focus solely on employer and employee pretax portions.
In addition to the above, the number of employees a business has must be figured out to determine the qualified wages that can be included.
When looking at the ERC, full-time employees are defined as someone that has worked at least 30 hours each week or 130 hours each month.
Here are some examples:
- A business that stayed open for the entire calendar year in either 2019 or 2020 would add the number of full-time employees and divide by 12.
- A new business that began in 2019 or 2020 would take the number of full-time employees in each calendar month in 2019 or 2020 and divide it by that number of months.
Related Links: What is Form 941?: An Intro Guide to ERC
Tipped Wage Qualification
Regarding tips qualifying as wages, the IRS notice 2021-49 noted that these wages could be included subject to FICA. Essentially this means that if tips are over $20 in one month for an employee, then all the tips would be qualified for the employee retention tax credit.
Funding Source Interaction with Other Sources
Essentially this rule says there is no double-dipping for credits. If you are a business that has taken the ERC, you cannot take credit on the same wages for paid family medical leave.
On top of this, if your business has employees that qualify for the Work Opportunity Tax Credit, they cannot be included in the ERC.
Don’t forget that the credit can only be used for wages that aren’t forgiven or expected to be forgiven, according to the PPP.
Related Links: IRS Form 941 Instructions & Free PDF Download
How Can Business Claim ERTCs?
You must fill out and file form 941-X and claim a refund for the past quarters in which the qualified wages were paid.
Retroactive Termination Guidance
There are certain conditions that need to be met so that you avoid the failure to deposit penalty. Notice 2021-65 lists all of these conditions that you need to be aware.
For example, if you are an employer who reduced employment tax deposits because you thought you would receive some employee retention credit in the last quarter of 2021 before you became ineligible due to the program’s early termination would need to follow the rules set forth by Notice 2021-65.
If you are a PEO/CPEO business that had reduced employment tax deposits and filed Form 7200 for receiving advanced payments, you will need to pay these back under your PEO/CPEO account.
Reconciliation for PEOs
You may be an employer that uses a PEO or CPEO. If this is the case, you don’t have to have an individual 941 filed on your behalf. Because of this, it’s essential to learn how you can reconcile this information and still get the employee tax credit.
If you are a business that utilizes a PEO or CPEO, you must report this on Form 941 and your Schedule R.
This guide is a general outline for understanding the Employee Retention Credit for businesses. For more detailed information, visit the IRS’s website or TaxRobot.com to contact one of our professionals today.