What is the Employee Retention Credit? Everything you need to know
Employee Retention Credit is designed to help small businesses who have been severely affected by the coronavirus pandemic to keep employees on their payroll.
Employee Retention Credit (ERC) was passed as part of the CARES Act back at the start of April. It is one of two new employer tax credits (the other being Credit for Sick and Family Leave). The ERC’s purpose is to help businesses who have been hit economically by the coronavirus pandemic to keep employees on their payroll. ERC is a refundable tax credit against certain payroll taxes equal to 50 percent of the wages up to $10,000 which an employer pays to employees after 12 March 2020, and before 1 January 2021.
Employers whose businesses have been partially or fully suspended due to governmental orders due to Covid-19 crisis, or businesses that have a significant decline in gross receipts compared to 2019 will be eligible for Employee Retention Credit.
For each employee, wages (including Medicare expenses) up to a maximum of $10,000 can be counted to determine the amount of the 50% credit. That means the maximum credit for an employer can receive for each employee is $5,000.
Because ERC applies to wages which were already paid after 12 March, many employers can get access to it by reducing upcoming tax deposits or by requesting an advance credit by submitting Form 7200, Advance of Employer Credits Due To Covid-19 by fax, email or on paper to the Internal Revenue Service (IRS). Advanced payments will be issued by paper check to employers.
Businesses can apply for ERC if their gross income for the first calendar quarter of 2020 (total sales or the total amount received for services) has been 50% less than the gross receipts they filed during the same quarter in 2019. Employers should keep records for the relevant calendar quarters in 2019 and 2020 to document the significant decline in gross receipts. The records should be available for IRS review for at least four years.
Some companies however, will not be eligible for ERC – for example, if an employer receives a Small Business Interruption Loan under the Paycheck Protection Program. Similarly, employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit (WOTC) under section 51 of the Internal Revenue Code for the employee.
How to claim ERC credit
In order to claim Employee Retention Credit, employers must report their total wages bill plus related health insurance or Medicare costs for each quarter on their quarterly employment federal tax returns, (this done by submitting Form 941 in the case of most employers), beginning with the second quarter. The credit is taken against the employer's share of social security tax but the excess is refundable under normal procedures.
If an employer chooses not to claim for ERC in one calendar quarter, they will still be able to claim in the following calendar quarter - as long as they meet requirements specified above.