Employee Retention Credit – Benefits, Claiming, and Calculation

employee retention tax credit written on a paper

Employee retention credit is a payroll tax credit that was enacted as part of the CARES Act. W1e will explore what employee retention credit is and how you can take advantage of it if you are an eligible employer.

What is Employee Retention Credit?

The Employee Retention Credit (ERC) is a refundable tax credit for employers equal to 50% of qualified wages paid to employees. Up to $10,000 per employee were paid to employees for all quarters after March 12, 2020 and before Jan. 1, 2021.

If an employer has more than one location, each location is treated as a separate entity for purposes of determining whether the employer meets the gross receipts test. However, all wages paid by an employer’s affiliated group of companies are taken into account in determining whether the 50% wage limitation is met.

What are the Benefits of Employee Retention Credit?

As businesses reopen after the COVID-19 pandemic, they may be able to claim a new tax credit for retaining employees. The ERC is a refundable tax credit for employers equal to 50% of qualifying wages paid to employees after March 12, 2020 and before January 1, 2021.

The credit is available to all employers regardless of size, including nonprofits, self-employed individuals, and households that employ domestic workers.

Employers can claim the credit even if they have received Paycheck Protection Program (PPP) loans, but not if they have laid off employees or reduced their hours or wages.

The maximum amount of wages eligible for the credit is $10,000 per employee per calendar year. Wages eligible for the credit include health insurance costs paid by the employer on behalf of the employee.

By retaining employees, businesses can avoid layoffs and maintain operations as they reopen and recover from the pandemic. The credit also helps businesses keep skilled workers who may be difficult to replace.

Who is eligible for the ERC?

To be eligible for the credit, an employer must have experienced a complete or partial suspension of operations due to a government order related to COVID-19. A significant decline in gross receipts (defined as a decline of more than 50% when comparing the quarterly gross receipts for the same quarter in 2019).

If an employer meets either of the above criteria, any employee who was on the payroll of the eligible employer as of March 13, 2020, and whose wages were not more than $100,000 on an annualized basis.

How do I calculate the ERC?

Employee Retention Credit = Eligible Wages x Qualified Retention Rate

For example, if you have 100 employees and you paid each employee $5,000 in eligible wages during the covered period, your total eligible wages would be $500,000. If you maintained 90% of your workforce during the covered period, your qualified retention rate would be 0.9. Therefore, your ERC would be $500,000 x 0.9 = $450,000.

Employers can claim the ERC against their Social Security tax liability. If the credit exceeds the amount of Social Security tax owed, employers can carry over the excess credits to future quarters.

How to Claim Employee Retention Credit?

Eligible employers must file Form 941 – Employer’s Quarterly Federal Tax Return, for each quarter in which they wish to claim the credit.

For more information on claiming the employee retention credit, please see the IRS’s guidance on the matter.

When is the expiration?

On August 4, 2021, the IRS released Notice 2021-49 that provides additional guidance regarding claiming the ERC for employers who pay qualified wages after June 30, 2021, and before January 1, 2022 [IR 2021-165, Notice 2021-49]. The ERC was due to expire on December 31, 2020.  However, the Consolidated Appropriations Act (CAA) 2021, extended the ERC through June 30, 2021. The CAA also expanded the ERC rate of credit from 50% to 70% of qualified wages. Extended again to 12/31/2021.

Conclusion

Employee retention credit is a valuable tool for businesses to keep their employees during tough economic times. It allows businesses to keep their workers on the payroll while also getting a tax break. This can be a huge help for businesses that are struggling to make ends meet. If you think you might qualify for employee retention credit, be sure to talk to your accountant to see if it’s right for you. For more employee/employer tips. Visit Uphires!