How the Employee Retention Credit For Businesses Works

The COVID-19 pandemic has negatively affected businesses around the nation. Due to this, some impacted businesses can take advantage of a reimbursable tax credit known as the Employee Retention Credit (ERC). The ERC is an incentive meant for employers to encourage employee retention during the pandemic. Read on to find out more about the Employee Retention Credit and its impact to your business during and after the epidemic.

What is Employee Retention Credit? 

The ERC is a reprieve measure meant to cushion businesses against the adverse effects of COVID-19. It is available to all employers who retain employees on the payroll and is equivalent to half of the qualified salaries up to a maximum of $10,000 per employee. The credit is available from March 13, 2020, to December 31, 2020.

How is Credit Retention For Employees Calculated? 

The credit amount is 50 percent of all qualifying wages paid to a maximum total of $10,000. Wages included in the calculation include the cash payments and a percentage of the health care cost provided by the employer. Eligible health care expenses include both the employer and employee percentage of the expenses, with salary reduction contributions before tax. Amounts that employees pay with after-tax contributions are not factored in the calculation.

What are Qualifying Wages? 

Qualifying salaries are determined by the number of average employees that a business had in 2019. There are two qualifying salaries measures depending on the size of a business.

Businesses with Fewer than 100 Workers

If the business had 100 or less workers in 2019, the credit amount is calculated based on the salaries paid to the employees, irrespective of whether or not the employees worked. If the workers were available on a full-time basis and got full-time salaries, the employer will still receive the credit. 

Businesses with More than 100 Workers 

If the business had 100 or more employees in 2019, the credit is only allowable for salaries paid to workers that did not work during the period.

Which Businesses Qualify for the Credit? 

All eligible employers can access the credit regardless of the size of their businesses. The following are the two categories of eligible employers:

• Employers who have partially or fully suspended operations during any calendar quarter because of the effects of coronavirus.
• Employers who experience a major decrease in gross receipts resulting from coronavirus in any calendar quarter in 2020. For example, a decline below 50 percent compared to the quarter amount in 2019.

However, the credit is not available to the earnings or services of self-employed persons.

How Does the Employee Retention Credit Work? 

The credit allows employers to get a 50 percent credit up to a maximum of $10,000 of their member of staff’s qualifying wage. Employers can get a maximum reimbursement of $5,000 for every employee for all quarters.

The credit will reduce the employer’s Social Security (SS) tax liability. If the credit is more than your SS tax liability, then the IRS will issue a refund.

How do I Claim the Credit? 

The process of claiming the employee retention credit is different from the other tax credits. There is no application for the credit; businesses can receive reimbursement straightaway by reducing their payroll tax payments. An employer can file the payroll tax deposits quarterly using Form 941 that captures their quarterly tax returns.

When to Report the Qualified Wages 

Employers can claim the credit on eligible wages paid from March 13, 2020, up to December 31, 2020. Any salaries paid earlier than March 13, 2020, or when the December 31, 2020, deadline lapses do not qualify.

What Happens If the Employee Retention Credit Is More Than the Payroll Tax Deposits?

If an employer’s tax deposits are less than the Employee Retention Credit, the employer can use Form 7200, which details the advance payment of the credits to employers because of COVID-19, and request for early payment from IRS. If you receive the advance amount and usually file Form 941 quarterly, remember to include the amounts advanced when filing. 

Claiming the ERC if You Have Another Loan or Credit 

You cannot claim the Employment Retention Credit if you have the Paycheck Protection Program (PPP) loan. Employers can only receive the Employment Retention Credit if they do not get and use the PPP loan. Employers are not eligible for the ERC after receiving the PPP loan and if the loan is forgiven.

However, employers who received and repaid the PPP loan before May 14, 2020, can get the ERC if they qualify for it.

Employers have a right to claim the FFCRA paid leave credits and the Employment Retention Credit. However, they cannot claim the two credits using the same salaries.

Examples of How You Can Calculate Employee Retention Credit 

If you are an employer with a single employee who you pay $5,000 in qualified salaries, you may receive a credit of $2,500. That is 50 percent of the $5,000.

If you provide the same employee with qualified health insurance amounting to $1,000, sum up the insurance and the eligible wages and multiply the resulting amount by 50 percent. In this scenario, your total credit amount would be $3,000.

In cases where you have more than one employee, remember that the maximum eligible wage per employee is $10,000. For example, if you have three employees and two of the employees each receive $10,000 in qualified wages while the third employee gets $20,000 in qualified wages, your maximum credit amount would be $15,000.

Other Available COVID-19 Tax Credits 

Other than the ERC, there is the Families First Coronavirus Response Act (FFCRA) paid leave credits. It came in place to assist employers in affording employees paid sick leave resulting from coronavirus complications and family leave as stipulated under the FFCRA. These are refundable paid sick leave and family leave credits reimbursable to employers who provide paid leave during the pandemic.

It is essential to note that employers can take both the paid leave and Employee Retention credit, but cannot claim the two using the same employee salaries. For assistance with claiming your employee retention credit, please contact your CPA.