An Employer’s Guide to Claim the Retention Credit for Employees
The Employee Retention Credit (ERC) is a refundable tax credit against certain payroll taxes. It was created as part of the CARES Act to assist businesses in maintaining employees in the event of a pandemic. The ERC is open to businesses or trades that were subject to a total or partial suspension as a result of a governmental decision or a substantial decline in gross revenues during the time of the pandemic. Its value is determined using a percentage percent of “qualified wages,” including any qualified health plan expenses that are allocable which an eligible employer must pay to its employees.
Who is eligible to be eligible for the ERC?
The ERC is available to businesses or companies that were subject to a complete or partial suspension due to a government order or significant decreases in gross revenue in the course of the pandemic. The eligibility requirements for the calendar the years 2021 and 2020 differ according to the information in greater details below.
Watch the ERC Tax Credit Video Here
Can non-profit organizations be qualified to apply for the ERC?
Yes. The ERC an tax-exempt, non-governmental entity as defined in Section 501(c) of the Internal Revenue Code that is exempt from taxation pursuant to subsection 501(a) (a) of the Code is considered to be engaging in an “trade or business” with regards to the entire activities of the company.
Can businesses or trades who have received the PPP loan be eligible for ERC?
Yes. At first, employers were required to decide between a Paycheck Protection Program (PPP) loan or applying for the ERC. It was the Taxpayer Certainty and Disaster Tax Relief Act of 2020 abolished the requirement, and eligible employers are now able to claim the ERC even if they has been the recipient of one or more loans from PPP. A qualified employer can’t however use the ERC on the wages that were used for PPP Loan forgiveness (i.e. there is no double-dipping).
What are the rules for the purpose of formulating an ERC in 2020 (IRS Notification 2021–20)?
In 2020, calendar year employers are able to apply for the ERC when they conducted any kind of business or trade in the calendar year and had either:
— A total or partial suspension business of their business or trade for any calendar quarter, because of a government order that restricts travel, commerce or group meetings due COVID-19, or
— A substantial drop in gross receipts of more than 50% contrasted with the same quarter in the previous period (beginning in the quarter of calendar year beginning January 1st, 2020).
A maximum of eligible wages that can be taken into consideration for every employee throughout quarters of the calendar is $10,000, which means that the maximum amount of credit that an employer is eligible to receive for wages that are qualified and that are paid to employees is $5,000 (50 percent of $10,000).
An employer with an average of over 100 full-time employees in the year 2019 (a Large eligible employer) Qualified wages are typically those payed to employees who do not provide services due to operations were either completely or partially suspended, or because of a decline of gross revenue. In the case of an employer with 100 or less full-time employees in the year 2019 (a small-sized eligible employer) Qualified wages are generally the wages that are paid to all employees during an interval when operations were either completely or partially suspended or in the period in which the employer saw a decrease in gross revenues, regardless of whether employees were providing services.
What are the rules for the purpose of formulating an ERC to 2021 (IRS Notices 2021–23, 2021–50 as well Code Section 3134)?
For the calendar year 2021, eligible employers are entitled to apply a credit of 70% of the qualified wages paid to employees on or after November 30, 2020 but prior to October 1st, 2021 up to a maximum of $10,000 limit per employee for each calendar quarter beginning in 2021 (resulting in the maximum credit amount of $7,000 per quarter for each employee — totalling $21,000 in 2021).2
From January 1, 2021 employers can apply for the ERC in the event that they were operating an enterprise or trade during 2021, and have experienced:
1. A complete or fractional suspension operating of their business or trade in a calendar quarter due to the basis of a government order restricting travel, commerce or group meetings due COVID-19, or
2. A decrease in gross receipts in the first, second , or third quarter of the calendar year 2021, where the gross earnings for the calendar quarter below 80% gross receipts of the previous year’s calendar in 2019.3
To determine eligibility by a decrease in the gross amount of their receipts, companies have the option to choose to use an alternative quarter in calculating gross receipts.4 With this option an employer can decide whether that decline in revenue requirement is satisfied for a calendar quarter beginning in 2021 by comparing the gross receipts from the preceding calendar quarter to the same for the calendar quarter in the year 2019. In this case, for example:
For the first quarter in 2021 an employer can decide to utilize its gross earnings for the fourth quarter of the 2020 calendar as opposed to those of the fourth quarter of the calendar year 2019 and
In the second calendar quarter 2021 employers may decide to use the gross earnings for the first quarter of calendar 2021 as compared to the first quarter of the calendar year 2019.
Starting 1 January 2021 to claim the ERC in relation to the qualified wages that were paid in 2021, an qualified employer will be defined by one which had a median of over 500 full-time workers in 2019 (as as opposed the 100–100 full-time equivalent).
What does the ERC impact federal income tax (income or deduction)?
The IRS has clarified it is not a factor in the ERC is not counted in the gross earnings for federal tax reasons. The ERC however, can limit the expenses employers that are eligible can claim on the federal income taxes (i.e. the deduction is allowed on the amount of wages paid that is equal to the amount of credits established for the taxable year).
Do you have time for you to apply ERC?
Yes. There’s still time to claim retroactively an ERC through filing form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Demand to Refund).
The deadline to file amended quarterly reports generally runs for at least three years following the date you file this form. For instance, in order to be eligible for to claim the Employee Retention credit for 2020’s second quarter, an amended report must be filed before July 2023.
Employers should seek an experienced lawyer to discuss eligibility, and to minimize risks during the claims process.
To assist employers in understanding the complexities regarding ERC benefits and claim procedures our team of attorneys for employee benefits have created the Employee RETENTION CREDIT Eligibility Questionnaire as well as a summary chart of eligibility requirements. Please click here for a copy of the ERC eligibility questionnaire or Scan the QR Code Below
