The Employee Retention Credit: Everything Employers Should Know
With the American Rescue Plan Act of 2021 extending the Employee Retention Credit (ERC) through December 31, 2021, many businesses are eager to take advantage of the program to stay afloat. But understanding how to apply for the relief can be confusing.
Complete Payroll Solutions is an outsourced payroll provider that has been guiding our more than 8,000 clients during COVID-19 on how to benefit from available relief programs to help them continue to make payroll.
Since the latest legislative development may make it challenging to know how to take advantage of the ERC, here we’ll cover:
- What is the ERC?
- How is the ERC calculated?
- Who is eligible for the ERC?
- How do I claim the ERC?
We’ll also discuss how to process the ERC credit if you run payroll with us and what we charge for our services.
After reading this article, you’ll understand whether your business can qualify for the ERC and next steps for securing the much-needed relief.
What is the ERC?
The Employee Retention Credit or ERC is a fully refundable payroll tax credit. It’s available to companies that have partially or fully suspended their operations due to COVID-19 or have had a significant decline in gross receipts compared to 2019.
Designed to encourage businesses to keep employees during these times, the credit allows employers to offset federal payroll taxes such as federal wage withholding and the employee’s share of Social Security and Medicare taxes. Employers who have received Paycheck Protection Program (PPP) loans may still qualify for the ERC with respect to wages that are not paid for with forgiven PPP proceeds.
Not only is the ERC refundable, but it’s also advanceable if you have 500 or fewer employees. That means if your employment tax deposits don’t cover the credit cost, you can get an advance payment from the IRS in the form of a check, which can help with cash flow issues. This check can be requested through Form 7200. It’s important to note that Form 7200 can only be requested for the current quarter and not previous quarters. We recommend that the refund be recorded on Form 941. The IRS will issue a check once it receives and processes the Form 941.
How is the ERC calculated?
Originally, the ERC was a tax credit equal to 50% of up to $10,000 in qualified wages paid after March 12, 2020, and before January 1, 2021, and was capped at $5,000 per employee.
The Relief Act amended and extended the employee retention credit and the availability of certain advance payments of the tax credits under section 2301 of the CARES Act for the first and second calendar quarters of 2021. The ARP Act modified and extended the employee retention credit for the third and fourth quarters of 2021. Under the new law, the credit amount is increased to 70% of qualified wages and the credit cap is increased to $7,000 for each quarter.
Another benefit of the new law is that group healthcare costs count as qualified wages even if you don’t pay any other wages to an employee, which allows you to account for the cost of furloughed employees.
Who qualifies for the ERC?
Before you can take the ERC, you need to determine your eligibility. Since not all businesses are eligible, it’s important to understand the conditions.
Originally, you could only claim the credit if you were either fully or partially suspended by a lockdown order or your gross receipts in any quarter in 2020 were less than 50% of gross receipts for the same quarter in 2019. This provision prevented most businesses from qualifying for the ERC, causing only a small fraction of companies to take advantage of the credit.
However, under the new law, it’s easier to be eligible since you now only need to show a decline in gross receipts of more than 20% for the same quarter in 2019. There are even certain rules that can allow you to take the credit if you weren’t in existence for all or part of 2019 and are a recovery startup business. The recovery startup business provision applies to companies that:
- opened a trade business after Feb 15, 2020 and
- have average annual gross receipts that do not exceed $1 million
Startup companies that meet these criteria are eligible to claim the ERC even if they don’t meet the significant decline in gross receipts or suspension of operations test. The amount of ERC available per employer under this provision is capped at $50K
How do I claim the ERC?
If you qualify, you’ll report your wages and employer health insurance costs for each quarter on your quarterly employment tax returns. You’ll also report your income as well as Social Security and Medicare taxes that were withheld from your employees’ paychecks and your portion of these payroll taxes.
In anticipation of receiving the ERC, you can get immediate access to the credit by reducing the employment tax deposits you’re otherwise required to make. Or, as we discussed earlier, you can request an advance of the credit. Also, any unused credit for the quarter can be reflected on the federal employment tax return as an overpayment amount to be refunded.
Keep in mind that if you’re seeking a retroactive tax credit, you will need to amend your payroll and tax returns to account for it. Also, retroactive refunds are subject to the original 2020 legislation and not the 2021 relaxed guidelines.
How do I process the ERC with Complete Payroll Solutions?
If you use Complete Payroll Solutions as your outsourced payroll provider, we can help guide you through the process of claiming the ERC for either the current quarter or a previous quarter. In order for us to do that, we’ll need:
- A waiver saying your company is eligible
- The effective date for which you’re claiming the credit (for retroactive credits, the effective start date must be after March 12, 2020)
- The period start and end dates of your PPP loan
- The amount of PPP funds received
When we have this information, we’ll process your current quarter payroll coding as well as amend any previous Form 941s. To amend returns, we charge an overall fee of $450. Once these amendments are accepted and processed by the IRS, you’ll get a refund.
Once processed, the credit will net against your payroll’s federal tax liability, except for FUTA. If your credit exceeds your liability, it will be applied towards future payroll tax liability.
Maximize Your Relief with the ERC and PPP
For severely financially distressed businesses, the expanded and extended ERC is a welcome relief. However, initially, many companies weren’t able to claim the ERC because they applied for PPP loans. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, you couldn’t take advantage of both programs. But recent legislation changed that and now you can get the ERC and a PPP loan.These combined incentives can help relieve some of the stress on employers. To learn about how the programs work together, read our next article.