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ZAEmployee Retention Credits
For employers who managed to maintain their payroll during COVID-19, the Employee Retention Credit (ERC) is a refundable tax credit that can help offset the cost of those wages. Here’s how it works.
The Employee Retention Credit (ERC) is also sometimes referred to as the Employee Retention Tax Credit or ERTC. It is a refundable tax credit for businesses and tax-exempt organizations that had employees during the COVID-19 pandemic.
The goal of the ERC is to help employers who experienced either a suspension of operations due to a government order or a significant decline in gross receipts in 2020 or the first three quarters of 2021. There’s also a provision for companies that meet the specific criteria for a recovery startup business.
To claim the ERC, eligible employers can file an amended employment tax return.
The Employee Retention Credit (ERC) is a tax credit introduced by the U.S. government to encourage businesses to retain employees during periods of economic uncertainty or significant revenue decline. The ERC was initially created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the economic challenges brought about by the COVID-19 pandemic.
The ERC was created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 2020, and has since been updated and adjusted by subsequent legislation, including the Relief Act, the American Rescue Plan Act (ARPA) of 2021, and the Infrastructure Investment and Jobs Act (IIJA).
The CARES Act, or the Coronavirus Aid, Relief, and Economic Security Act, was a significant piece of legislation passed by the U.S. Congress in March 2020 in response to the economic challenges and public health crisis caused by the COVID-19 pandemic. The CARES Act aimed to provide financial relief to individuals, businesses, healthcare providers, and state and local governments.
Some of the provisions of the Act included stimulus payments, expanded unemployment benefits, the delay of payroll taxes, healthcare funding and the creation of the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC).
The Consolidated Appropriations Act, 2021, often referred to as the CAA 2021, was signed into law on December 27, 2020. It included various provisions aimed at addressing the ongoing economic challenges related to the COVID-19 pandemic, including the extension of the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC).
The American Rescue Plan Act (ARPA) of 2021 was signed into law on March 11, 2021, and continued to expand the government’s response to the ongoing economic challenges resulting from the COVID-19 pandemic.
The Act added a number of new programs, including the Child Tax Credit (CTC) expansion, new state and local government aid, COBRA premium assistance, housing assistance, and further funding of the Paycheck Protection Program (PPP).
ARPA also extended the Employee Retention Credit through the end of 2021 and made several modifications, including increasing the credit rate and allowing certain small startup businesses to claim the credit.
The Infrastructure Investment and Jobs Act (IIJA) was signed into law on November 15, 2021. The IIJA represents a significant bipartisan effort to invest in the country’s infrastructure in areas such as transportation, public transit, railways, broadband, water, energy, electric vehicle charging and climate mitigation.
The IIJA also dictated that an employer can no longer claim Employee Retention Credits (ERC) for wages that were paid after Sept. 30, 2021.
The Employee Retention Credit (ERC) is a tax credit provided by the U.S. government to encourage businesses to retain their employees during periods of economic uncertainty.
If you did not claim the ERC on your quarterly payroll tax return (Form 941) in the past, you may be able to claim it retroactively in 2023 using Form 941-X, which is an adjustment to your original return. However, it is important to be aware of how the ERC interacts with other COVID-19 relief programs, such as the Paycheck Protection Program (PPP), as there are restrictions on claiming both benefits for the same wages.
In 2023, it may be possible to retroactively claim the ERC for 2020 and the first three quarters of 2021 tax. Eligible businesses can claim a maximum of $5,000 per employee for 2020 and up to $7,000 per employee per quarter in 2021. That means it could be possible to receive up to $26,000 in total per employee for the 2020/21 period.
To qualify for the ERC, private companies (including nonprofits) must meet one of the following criteria:
Employers should be aware that it is not possible to use the same wages to claim benefits under both the ERC and the Paycheck Protection Program (PPP). That means it is necessary to decide which wages to allocate to which program.
The ERC applies to qualified wages. For small businesses, all of the wages paid to workers, both full-time and part-time, count as qualified wages and are eligible for the ERC. For 2020, a small business was defined as less than 100 employees. In 2021, the threshold rose to 500 employees.
For businesses with more than 100 or 500 employees in 2020 and 2021 respectively, qualified wages are only those that were paid to workers when they were not actually able to be present at work due to shutdowns or other restrictions.
One of the criteria for eligibility for the Employee Retention Credit (ERC) involves a government-mandated full or partial suspension of business operations.
The government orders leading to the suspension must be issued at the federal, state, or local level. These orders might include closures, stay-at-home orders, restrictions on business operations, or other measures that directly impact the ability of a business to continue its normal operations.
Another key criterion for eligibility for the Employee Retention Credit (ERC) is a significant decline in gross receipts.
Employers are eligible for the ERC if they experienced a significant decline in gross receipts when comparing a current calendar quarter to the same quarter in the prior year. In 2020, employers needed to show a decline of 50% versus the same quarter of 2019. In 2021, the required decline was 20% versus the same quarter of 2019 or of 2020 if the business did not exist in 2019.
The American Rescue Plan Act extended the ERC program to startup businesses. Your startup may be eligible if:
It may also be possible to qualify if you purchased an existing business that was in operation before February 15, 2020.
If you have at least one W2 employee and you experienced a government-mandated business shutdown during COVID-19 or a decline of at least 50% in your quarterly revenue during 2020 or 20% in 2021, you may be eligible for the Employee Retention Tax Credit.
If you were eligible for the ERC while the program was active, you would have made your claim by completing Form 941, Employer’s Quarterly Federal Tax Return. The credit is reported on Line 11c of Form 941 for the relevant quarter. If you did not apply at that time, it is still possible to claim the credit by completing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
In order to apply, you will want to determine the amount of the credit you may be eligible for. The credit is typically a percentage of qualified wages paid to eligible employees, subject to certain limits. Then you must collect necessary documentation, including records of gross receipts, government orders (if applicable), and information about qualified wages in order to support your ERC claim.
Qualified Wages for employers with 100 or fewer employees include wages paid to all employees, whether the business was open or closed.
The maximum amount of qualified wages that can be considered for each employee is based on the employee’s average wages during a specified period. For periods in 2020, the maximum amount of qualified wages per employee was $10,000 for the entire year with a maximum claim of $5,000 per employee. For periods in 2021, the maximum amount of qualified wages per employee was $10,000 per quarter with a maximum claim of $7,000 per employee per quarter.
Eligible employers can include certain health plan expenses in the calculation of qualified wages. This includes both employer and employee contributions to health plans.
Yes. On September 14, 2023, the IRS announced a moratorium on processing new Employee Retention Credit (ERC) claims. Businesses can still submit an ERC claim, but processing times will be longer, likely six months or more. The IRS will not review any new claims until at least January 1, 2024.
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The Employee Retention Credit (ERC) is also sometimes called the Employee Retention Tax Credit (ERTC). It provides a financial incentive to employers who continued to pay wages to employees despite facing economic hardships during the COVID-19 pandemic. Here are some key questions and answers:
Eligibility criteria include businesses that saw a significant decline in gross receipts or experienced a government-mandated suspension of operations due to COVID-19.
The ERTC is calculated as a percentage of qualified wages paid to eligible employees. The percentage and limits can vary based on the time period and specific eligibility criteria.
Yes, the ERTC is a refundable tax credit. If the credit amount exceeds the employer's share of Social Security tax liability for a quarter, the excess can be treated as an overpayment and refunded.
If you wish to amend an Employer's Quarterly Federal Tax Return (Form 941) for a past year in order to claim the ERTC, you may do so using the Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund (Form 941-X).
For all quarters in 2020, the deadline to apply is April 15, 2024. For all quarters in 2021, the deadline is April 15, 2025.
The Infrastructure Investment and Jobs Act (IIJA) dictated that an employer can no longer claim Employee Retention Credits (ERC) for wages that were paid after Sept. 30, 2021. However, you may be able to retroactively claim the credit if you apply by the following deadlines:
Yes, it is possible to receive with the Employee Retention Tax credit and a loan under the Paycheck Protection Program, but it is not possible to use the same wages to apply for both. For example, if you receive the ERC for the wages of a certain employee in a certain period, you cannot also receive a PPP loan to cover those same wages.
According to the IRS website, individual taxpayers who are not business owners and self-employed individuals who do not have employees are not eligible for the ERC. By most definitions, this would mean freelancers are not eligible.
Even though the tax credit expired in September 2021, qualified businesses, companies, and employers can still file paperwork and retroactively receive claims for the Employee Retention Credit in 2023. To do so, business owners must file IRS Form 941-X which is used to make corrections to their originally filed Form 941s. However, this can only be done up to three years after they originally filed their payroll tax returns.
According to the IRS, “For purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date.” Therefore, Forms 941-X for eligible quarters in 2020 must be submitted to the Internal Revenue Service by April 15, 2024. Similarly, the ERC deadline to claim ERC funds for eligible quarters in 2021 must be submitted by April 15, 2025.
Initially, businesses could expect to receive their Employee Retention Credits within 2-3 months of filing. On September 14, 2023, the IRS announced a moratorium on processing new claims, in part to implement more detailed reviews. As a result, it is expected that the IRS will not review any new claims until at least January 1, 2024 and that processing times will likely be 180 days or more. Payouts for previously filed claims will continue, but at a slower pace.
Yes, any wages for which you pay FICA tax count as qualified wages.
Yes, wages for both part-time and full-time workers qualify.
No, the Employee Retention Credit is a fully refundable tax credit that eligible employers claim against certain employment taxes. It is not a loan and does not have to be repaid.
Yes. Even though the tax credit expired in September 2021, qualified businesses can still apply for and receive the ERC in 2023. To do so, you must file IRS Form 941-X, which is used to make corrections to the Form 941 that was originally filed. This can be done up to three years after the originally filing.
Form 941-X for eligible quarters in 2020 must be submitted to the Internal Revenue Service by April 15, 2024, and for eligible quarters in 2021, it must be submitted by April 15, 2025.
Written by
Michael David is a financial writer and former investment advisor. Writing for Capital Group, Dimensional Fund Advisors, Franklin Templeton Investments, HSBC, Invesco, PIMCO, Vanguard, global insurance companies, major banks and others, he has educated professionals, business owners and consumers about strategies for investing, insurance, banking and corporate finance for more than 20 years.
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