The Employee Retention Tax Credit – Zupnick Associates

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 (By: B. Brooks)

 

The CARES and American Rescue Plan Acts were implemented to help the nation during the pandemic. There are a few tax credits included with the legislation.

The Employee Retention Credit (ERC). It’s a large tax break to take advantage of if you’re an eligible employer. Below you’ll find:

  1. What is the Employee Retention Tax Credit?
  2. Employer Eligibility
  3. What are qualified wages?
  4. How to claim your Employee Retention Tax Credit

              

1. What is the Employee Retention Tax Credit?

The Employee Retention Tax Credit (ERC) was initiated last year in March of 2020. It was established so employers could keep their staff on payroll and employees could avoid unemployment. Inadvertently, this made an employee rescue plan for employers.

What it actually is, is an employer tax credit applied toward the employment taxes you owe. Once approved, you can use the tax credit immediately. If the tax credit amount is more than your employment taxes, you may be eligible for a refund from the IRS. Below is the nitty gritty.

For 2020:

The tax credit is equal to 50% of qualified wages paid to your employees. Up to $10,000 per employee can qualify for 50% of qualified wages for the year. You can also include certain health coverage costs, with a maximum of $5000 for each full-time employee retained between March 13, 2020-December 31, 2020.

For 2021:

The ERC increased to 70% of qualified wages paid to your employees. Instead of the cap being $10,000 per employee for the year, it is now per calendar quarter. You can still include health coverage costs with qualified wages paid.

Maximum of $7,000 per calendar quarter for each full-time employee retained between January 1, 2021-June 30,2021.

*Subject to eligibility: 2020 & 2021

2. Employer Eligibility

For 2020:

Effective: March 13, 2020- December 31, 2020

You must have operated a trade or business within the dates mentioned above. Requirements:

  • Your business experienced a full or partial closure due government orders limiting business, travel, groups, and meetings because of COVID-19
  • Or you experienced a remarkable decrease in gross sales:

o   Decrease in sales begins on the first calendar quarter of 2020

o   Your gross sales are less than 50% compared to the same calendar quarter in 2019

  • The remarkable decrease in sales ends:

o   The first day of the first calendar quarter your gross sales are above 80% for the same calendar quarter in 2019

DO NOT QUALIFY: If you received a Small Business Interruption Loan under the Paycheck Protection Program. You are not eligible for the 2020 Employee Retention Credit.

For 2021:

Effective: January 1, 2021- June 30, 2021

You must have operated a trade or business within the dates mentioned above. Guidelines your company must fall in:

  • Your business experienced a full or partial closure due government orders limiting business, travel, groups, and meetings because of COVID-19
  • Or you experienced a remarkable decline in gross sales in a 2021 calendar quarter:

o   Gross sales dropped below 80% in comparison to the same calendar quarter in 2019

o   To use a 2020 calendar quarter for eligibility, gross sales must be below 50%

  • For employers that didn’t exist in 2019:

o   You may use the corresponding calendar quarter in 2020 to determine a decline in sales

o   You may also use the 1st and 2nd calendar quarters in 2020 to determine a decline in sales

Important: Employers who received a Small Business Interruption Loan under the Paycheck Protection Program can now claim the ERC for qualified wages.

   *Restrictions Apply

 

3. What are qualified wages?

Depends on the number of employees you employ. You can also include certain health care costs with qualified wages. Can only count qualified wages up to the amount an employee would have been paid for working within a 30 day period

Does not include wages for paid sick and family leave under the Families First Coronavirus Response Act.

For 2020:

o   Wages paid to employees who are not providing services because of a lack in a gross sales, full business closure, or partial closure

  • If you employed less than 100 full-time employees in 2019:

o   Wages paid to employees whether they provide services or not due to a lack in gross sales, full business closure, or partial closure

Up to $10,000 per employee for the year.

For 2021:

o   Wages paid to employees who are not providing services due to a lack in gross sales, full business closure, or partial closure

  • If you employed less than 500 full-time employees in 2019:

o   Wages paid to employees whether they provide services or not due to a lack in gross sales, full business closure, or partial closure

Up to $10,000 per employee per calendar quarter.

4. How to claim your Employee Retention Tax Credit

Eligible employers can use their quarterly employment tax return to report the total of qualified wages with related health coverage costs. Most employers will use the Form 941. Consult your tax advisor to ensure you are using the correct forms.

The employer tax credit will be issued toward your portion of the employee’s Social Security taxes. It is a refundable tax credit. If there is any overage you may be able to request a refund. (*Subject to restrictions*)

With the expectation of claiming the ERC, you may also retain the amount of employment taxes you would have deposited:

  • Federal income tax withholding
  • Employee’s share of Social Security & Medicare taxes
  • Employer’s share of Social Security & Medicare for all employees

Up to the amount of the tax credit without penalty. It does not include deposits paid for paid sick and family leave.

The Employee Retention Credit has complex guidelines and regulations. Consult your tax advisor or consultant to ensure you are filing what’s right for your company.

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