The Employment Retention Credit, widely referred to as the ERC, is a refundable tax credit program provided to small businesses by the government. The program is meant to help small enterprises subsidize the costs eligible employers pay their employees to aid employee retention.
Employers can now recover up to 70% of qualified wages through the program, including health benefit expenses paid to employees since the pandemic hit. However, the ERC program is complex, and the conditions have changed so much since its implementation, adding to the confusion.
Below, we break down everything you need to know about the Employee Retention Credit (ERC) program. We will take you through its importance, eligibility requirements, and how to mitigate the financial risks of keeping your workforce employed.
The Evolution of the Employment Retention Credit
The government enacted the ERC at the beginning of the pandemic to help more employers retain their employers as the economy was shaken. Since its enactment, three laws have brought about changes and expansion of the program.
1. Coronavirus Aid, Relief, and Economic Security (CARES) Act
On March 13, 2020, the CARES act was enacted for qualifying employers with 1-100 W2 qualifying employees. Employers could claim the credit against 50% of qualified employee wages paid between March 13, 2020, and December 31, 2020. The credit was allowable for wages amounting to $10,000 per employee annually.
2. Consolidated Actions Act (CAA)
The CAA established in December 2020 brought enhancements to the ERC. The most notable changes include an extension of the coverage period to cover the first two-quarters of 2021 instead of ending in December 2020. In addition, employers with 1-500 employees now qualify and can claim credit tax on 70% of qualifying wages up to $10,000 per applicable quarter.
3. American Rescue Plan Act (ARPA)
According to the ARPA, employers can claim up to 70% of qualifying employee wages or a maximum of $7,000 per employee for every quarter. This is applicable for two more calendar quarters between June 30 and December 31, 2021.
Who is Eligible For ERC?
An employer qualifies for employee retention benefits if they satisfy two primary requirements:
- They are faced with a significant decline in their gross receipts. To qualify in the tax year 2020, you must have experienced at least a 50% reduction in gross receipts compared to a corresponding calendar quarter in 2019. This changed with the CAA and ARPA seeing that now you qualify if you see 20% gross receipts compared to an identical calendar quarter in 2019 or the quarter you started the business.
- They are affected by a full or partial suspension of business operations due to government COVID-19 orders. You only qualify for the portion of the quarter when your business operations are disrupted and not the whole quarter.
Applicants who already received loans under the Paycheck Protection Program (PPP) still qualify for the tax benefits from employee retention. However, this is limited to wages that are not forgiven under the PPP.
Fortunately, employers with PPP loans can maximize their ERC benefits by including all their eligible non-payroll expenses, such as operational expenses, rent, and utilities, in their PPP forgiveness report. Additionally, employers cannot use the same wage period to apply for both benefits.
The eligibility is also based on the number of company employees, which now ranges between one and 500 employees, excluding the employer.
- Employers with 500 or fewer employees can apply for ERC on all qualified wages paid to all full-time employees whether the employees were working or not during the particular quarter.
- Employers with more than 500 full-time employees ERC can only be levied on the wages paid to employees who were not working during a specific quarter due to a company suspending its operations or a significant gross receipts decline.
What Are the Qualified Wages?
According to the ERC, qualified wages are any compensation to part or all full-time employees for a specific quarter. These include qualified health plan expenses incurred by an employer. These wages must be subject to FICA taxes and paid after March 12, 2020.
Who Is a Full-Time Employee?
According to the ERC program, a full-time employee works at least 30 hours per week or 130 hours a month during any calendar month of 2019. The full-time employee equivalent for the ERC varies from the PPC forgiveness report.
How To Apply For ERC Credits
The ERC is fully refundable and applied after the deduction of employer Social Security taxes. Furthermore, you receive any amount of excess credit of your total liability for your Social Security taxes.
The IRS issued a Notice-2021-21 to provide employers with necessary guidelines on how to claim ERC credits. According to the notice, if you are eligible, you need to calculate your qualified wages, including your Social Security and Medicare taxes, and account for this credit on IRS File 941 Employer’s Quarterly Federal Tax Return.
You should also include any qualified family leave and sick leave wages approved under the FFCRA. Employers who have already filed their year 2020 taxes can utilize the File 941-X Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund to retrospectively claim their credits for the past qualifiable quarters when wages were paid. This, however, only applies to wages paid before December 2020.
Quentelle Can Help You Maximize Your ERC
If you are looking for help with the calculation of your ERC credits, look no further. Quentelle is here to provide you with tech-driven solutions for employment verification and point-of-hire credits. We use an advanced platform and employ the best practices to provide you with streamlined income and employment verification requests.
VeriSafeJobs is our world-class platform that not only gets the job done but also keeps your private data safe and secure all the time. With us, you do not have to worry about all the complexities of the ERC, as we will handle it all for you.
If you’d like to find out more about how we can help you simplify your ERC eligibility or claim process, schedule a demo today to see everything our superior solution can do for you.