The employee retention credit program has left business owners needing clarification and support.
This guide covers everything from determining eligibility to end-to-end claims and refunding processes. It also includes specific program expertise that your CPA or payroll servicer may need to gain.
What is the ERC?
The Employee Retention Credit (ERC) is a payroll tax credit that can be refunded and applies to wages paid by qualifying employers.
ERC is a valuable tool for employers who lost money during the pandemic and want to keep their critical employees. It can be claimed retroactively by amending an employer’s quarterly employment tax return using IRS Form 941-X.
Businesses need to understand what is the employee retention credit, how it works, and its requirements. The Employee Retention Credit (ERC) depends on payroll taxes, not income taxes, and can cover up to 50% of wages paid to eligible employees during 2020 and 2021.
There have been many changes to the ERC program since it was first enacted in 2020, and new laws are continuing to be passed. This creates many questions for both business owners and their tax partners.
Who is an Eligible Employer?
The ERC is calculated based on 70% of up to $10,000 in qualified wages paid during a quarter. Qualified wages include salary, hourly pay, commissions, and other forms of compensation. However, the credit excludes tipped wages, employer-provided health care costs, and any time paid not working due to a COVID-19-related illness or government orders.
Eligible employers can claim the credit by reducing their employment tax deposits for the quarter the anticipated credit amount will be claimed. If the anticipated credit amount needs to be increased to reduce employment tax deposits, an eligible employer may request advance credit payment by filing Form 7200. The ERC program has technically ended, but eligible employers have until 2024 and, in some cases, until 2025 to retroactively claim the credits by filing IRS Form 941-X for the relevant quarters.
How is the ERC Calculated?
The ERC is designed to help business owners keep their employees on the payroll during a difficult time, avoid costly layoffs, and minimize the number of workers filing for unemployment. However, figuring out how much credit your business might receive can be confusing.
The first step is determining whether you meet the particular quarter’s ERC eligibility requirements. This is done by comparing your gross receipts from the quarter in question to the same quarter in 2020.
From there, you need to determine how much you paid in total qualified wages. These are all the wages you paid your employees during the bad phase of the pandemic, including their health insurance costs (as long as those expenses were deducted correctly). Once you have a list of qualifying and total qualified wages, you can calculate how much ERC you can receive. This will be your claim amount for the IRS form 941-X, which is required to file your ERC.
What Are the Eligibility Requirements?
The ERC is a type of credit that can lower your tax bill, but it’s only available if your business is eligible. To qualify, your business must have kept operating during a quarter when either governmental orders or a major decrease in gross receipts made it stop operations. Additionally, your business must have paid its workers wages during that time.
Qualifying wages include salary, hourly pay, commissions, and other forms of compensation. Each employee can receive a credit for up to $10,000 of qualifying wages paid to them.
For 2021, a small business can claim a quarterly credit of 70% of its first $10,000 in qualified wages paid to its employees. In 2022, the credit will be lowered to 50% of the initial $10,000 in qualified wages given to each eligible employee. The credit can be claimed retroactively by filing Form 941-X to amend quarterly returns for 2020 and 2021.
How Do I Claim the ERC?
Whether you have been through a COVID-19-related shutdown or experienced a significant decline in gross receipts, money may be waiting for your business under the ERC. Eligible companies can retroactively file for the ERC by filing Form 941-X, Amended Employer’s Quarterly Federal Tax Return, or Claim for Refund.
The ERC is a refund in the form of employer credits that reduce the amount of qualified wages and eligible health costs paid to employees during a tax period. Eligible small businesses can claim up to $26,000 per year.
If you find the ERC application process complicated, seeking help from a qualified CPA or payroll provider who specializes in ERC can be beneficial. Their expertise can assist you in determining eligibility, analyzing your claim in detail, and providing guidance on documentation requirements. They can also offer specific knowledge about the program which your regular CPA or payroll processor might not have. This includes assessing the impact of your PPP loan on your eligibility and considering how aggregation rules will apply to large multinational firms.
