The Employee Retention Credit (ERC) was first announced in 2020, and is a refundable tax credit for eligible employers. Initially introduced as part of the Cares Act, it was created in an effort to encourage businesses to keep employees on their payroll, despite the challenges brought on by the COVID-19 pandemic.
After first being introduced in 2020, the Employee Retention Credit was extended to retroactively pay qualified wages eligible through the end of 2021. Businesses have three years from September 30, 2021 to determine if they have qualified wages dating back to March 12, 2020. Businesses of all kinds faced unprecedented challenges in 2020 and 2021, and the ERC aims to provide some relief to those who were able to retain their staff during the pandemic.
Let’s take a look at what the Employee Retention Credit could mean for you as a business owner:
Does My Business Qualify for the Employee Retention Credit?
To qualify for the Employee Retention Credit, businesses must meet one of two criteria. Either their operations must have been fully or partially suspended due to a government order related to COVID-19, or the business must have had a “significant decline in gross receipts”.
Originally, the qualifying decline in gross receipts was less than 50% in any quarter in 2020 compared to the same quarter in 2019. However, the American Rescue Plan Act of 2021 revised that to be a decline in gross receipts of more than 20% compared to the same quarter in 2019. If you were not in business in 2019, you can use 2020 as your comparison year.
It’s important to note though, that self-employed people cannot use the Employee Retention Credit for earnings that were paid to themselves. However, if their business is otherwise eligible, they may be able to use the credit to claim wages they paid to other individuals throughout the pandemic.
Another thing to be aware of is that the eligible time periods are broken up by quarter, and eligibility is assessed for each specific quarter. So, if your business operations were halted or your revenues were greatly reduced for only a couple of months, you may still be able to claim the tax credit for wages paid during that quarter, even if your business returned to normal afterward.
Which Employees Qualify Me for the ERC?
The Employee Retention Credit defines a full-time employee as any employee who worked a minimum of 30 hours per week in 2019, whom you continued to pay in 2020 or 2021, even if they were not actively working.
For the eligible quarters in 2020, if your business had more than 100 full-time employees, you can only claim those employees you kept but who are not actively working. If you had 100 or less full-time employees during an eligible quarter in 2020, you can claim the Employee Retention Credit for all of them, regardless of whether they were actively working or not.
For the eligible quarters in 2021, the threshold was bumped up to 500 full-time employees. So, if you had more than 500 full-time employees during an eligible quarter in 2021, you can only receive the credit for those who were not working, and if you had 500 or less full-time employees you could claim the credit for all of them.
Can I Still Claim the Employee Retention Credit Even If I Received PPP Funds?
When the Employee Retention Credit was first established, businesses who had received a Paycheck Protection Program Loan were not eligible. However, subsequent updates to the ERC reversed that rule, and made the reversal retroactive to March 27, 2020. PPP recipients may now claim the Employee Retention Credit for qualified wages paid, however they cannot claim the ERC on any wages used to qualify for PPP forgiveness. In other words – no double dipping.
How Much Can I Receive from the Employee Retention Credit?
How much of a credit you can receive through the ERC depends on which time period the qualified wages were paid in. Generally though, the Employee Retention Credit allows eligible businesses a tax credit of up to $5,000 per employee for qualified wages paid in 2020. However, the ERC was increased to allow eligible businesses a tax credit of up to $28,000 per employee, or $7,000 per quarter, for qualified wages paid in 2021. Initially, the Employee Retention Credit was only extended to apply to wages paid through June 30, 2021, which would have made wages paid in Q3 and Q4 of 2021 ineligible, but the American Plan Rescue Act further modified the credit to apply to qualified wages paid through December 31, 2021. If you started your business in 2020 or after, the credit is capped at $50,000 per calender year.
How Do I Claim the Employee Retention Credit?
Because the ERC is a tax credit, you can receive it by reporting the total qualified wages for each quarter on your federal employment tax return - typically Form 941: Employer’s Quarterly Federal Tax Return. As a tax credit, the amount of the credit you qualify for effectively decreases your tax burden. So, if you would otherwise owe $8,000 in taxes, but you qualified for a $5,000 credit through the ERC, you would only owe $3,000 in taxes.
Overall, it’s important to remember that each business has their own unique situation that may or may not qualify them for the Employee Retention Credit. The amount of the credit you qualify for will also be determined by your business’s individual circumstances. For more information on the Employee Retention Credit, visit https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs.
BankFive has partnered with Complete Payroll Solutions to help our business customers determine potential ERC eligibility. Work with a dedicated professional who will help submit necessary documents and guide you through the tax credit process. If you are a small business owner in MA or RI, contact our Business Team today for more information.
After first being introduced in 2020, the Employee Retention Credit was extended to retroactively pay qualified wages eligible through the end of 2021. Businesses have three years from September 30, 2021 to determine if they have qualified wages dating back to March 12, 2020. Businesses of all kinds faced unprecedented challenges in 2020 and 2021, and the ERC aims to provide some relief to those who were able to retain their staff during the pandemic.
Let’s take a look at what the Employee Retention Credit could mean for you as a business owner:
Does My Business Qualify for the Employee Retention Credit?
To qualify for the Employee Retention Credit, businesses must meet one of two criteria. Either their operations must have been fully or partially suspended due to a government order related to COVID-19, or the business must have had a “significant decline in gross receipts”.
Originally, the qualifying decline in gross receipts was less than 50% in any quarter in 2020 compared to the same quarter in 2019. However, the American Rescue Plan Act of 2021 revised that to be a decline in gross receipts of more than 20% compared to the same quarter in 2019. If you were not in business in 2019, you can use 2020 as your comparison year.
It’s important to note though, that self-employed people cannot use the Employee Retention Credit for earnings that were paid to themselves. However, if their business is otherwise eligible, they may be able to use the credit to claim wages they paid to other individuals throughout the pandemic.
Another thing to be aware of is that the eligible time periods are broken up by quarter, and eligibility is assessed for each specific quarter. So, if your business operations were halted or your revenues were greatly reduced for only a couple of months, you may still be able to claim the tax credit for wages paid during that quarter, even if your business returned to normal afterward.
Which Employees Qualify Me for the ERC?
The Employee Retention Credit defines a full-time employee as any employee who worked a minimum of 30 hours per week in 2019, whom you continued to pay in 2020 or 2021, even if they were not actively working.
For the eligible quarters in 2020, if your business had more than 100 full-time employees, you can only claim those employees you kept but who are not actively working. If you had 100 or less full-time employees during an eligible quarter in 2020, you can claim the Employee Retention Credit for all of them, regardless of whether they were actively working or not.
For the eligible quarters in 2021, the threshold was bumped up to 500 full-time employees. So, if you had more than 500 full-time employees during an eligible quarter in 2021, you can only receive the credit for those who were not working, and if you had 500 or less full-time employees you could claim the credit for all of them.
Can I Still Claim the Employee Retention Credit Even If I Received PPP Funds?
When the Employee Retention Credit was first established, businesses who had received a Paycheck Protection Program Loan were not eligible. However, subsequent updates to the ERC reversed that rule, and made the reversal retroactive to March 27, 2020. PPP recipients may now claim the Employee Retention Credit for qualified wages paid, however they cannot claim the ERC on any wages used to qualify for PPP forgiveness. In other words – no double dipping.
How Much Can I Receive from the Employee Retention Credit?
How much of a credit you can receive through the ERC depends on which time period the qualified wages were paid in. Generally though, the Employee Retention Credit allows eligible businesses a tax credit of up to $5,000 per employee for qualified wages paid in 2020. However, the ERC was increased to allow eligible businesses a tax credit of up to $28,000 per employee, or $7,000 per quarter, for qualified wages paid in 2021. Initially, the Employee Retention Credit was only extended to apply to wages paid through June 30, 2021, which would have made wages paid in Q3 and Q4 of 2021 ineligible, but the American Plan Rescue Act further modified the credit to apply to qualified wages paid through December 31, 2021. If you started your business in 2020 or after, the credit is capped at $50,000 per calender year.
How Do I Claim the Employee Retention Credit?
Because the ERC is a tax credit, you can receive it by reporting the total qualified wages for each quarter on your federal employment tax return - typically Form 941: Employer’s Quarterly Federal Tax Return. As a tax credit, the amount of the credit you qualify for effectively decreases your tax burden. So, if you would otherwise owe $8,000 in taxes, but you qualified for a $5,000 credit through the ERC, you would only owe $3,000 in taxes.
Overall, it’s important to remember that each business has their own unique situation that may or may not qualify them for the Employee Retention Credit. The amount of the credit you qualify for will also be determined by your business’s individual circumstances. For more information on the Employee Retention Credit, visit https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs.
BankFive has partnered with Complete Payroll Solutions to help our business customers determine potential ERC eligibility. Work with a dedicated professional who will help submit necessary documents and guide you through the tax credit process. If you are a small business owner in MA or RI, contact our Business Team today for more information.