Did you know that in May of 2020 over twenty-three million people lost their jobs due to the COVID-19 pandemic? To protect employees from lay-offs related to the pandemic, the government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act.
This act contains a business provision known as employee retention credit that encourages employers to keep their full-time employees. But, exactly what is employee retention credit?
Many business owners think that employee retention credits only worked during 2020. However, the reality is that you can still take advantage of them in 2021.
In this guide, we’ll teach you everything that you need to know about employee retention credits and how you can use them. That way, you can both keep the employees you love and save money. Let’s get started!
What Is Employee Retention Credit?
Before we begin, it’s important that we first understand exactly what an employee retention credit is. An employee retention credit, or ERC, is a refundable payroll tax credit. Typically a tax credit is non-refundable.
That means that the tax credit can only offset the amount of liability that’s owed. As such, if the credit brings this liability down to zero, then no actual money is refunded. This is markedly different from a renewable credit.
This type of credit can bring the liability down to zero and still refund the amount of money to the individual. The point of this employee retention credit was to keep long-time employees on the company payroll, even if they’re incapable of working during the prolonged pandemic.
That way, job loss doesn’t reach astronomical levels and businesses don’t lose a ton of money to keep their employees. Originally, this was only supposed to cover employees from March 13, 2020, to Dec. 31, 2020. However, as we will see in the next section, this type of credit has gone through a variety of different forms.
Wasn’t the Employee Retention Credit Only Available Last Year?
It’s true that the CARES Act originally only ran from March 13, 2020, to Dec. 31, 2020. However, the employee retention credit wasn’t widely used until March of 2021. In March the IRS updated the regulation for who qualified for the credit.
That means that all of the businesses that once had to choose between either the PPP (Paycheck Protection Program) or the employee retention credit can now have both. All that they need to do is amend their Form 941 when filing taxes.
What Are the Different Forms It Gone Through
As of the time of this article employee retention credits have arisen in three different forms. These forms include the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act from 2020, the Consolidated Appropriations Act from 2021, and the American Rescue Plan from 2021.
Let’s start with the 2020 CARES Act. This act allowed eligible employers to claim a credit against 50% of the qualified wages paid. However, there was a cap for $10,000 for each employee from the period of March 13, 2020, to Dec. 31, 2020.
Included in this category were borrowers who took a loan from under the original PPP. That means employers could save up to $5,000 per employee. Unfortunately, these requirements were quite strict.
And, on top of that, they didn’t save people that much money. As such, they were amended. Next, there’s the 2021 Consolidated Appropriations Act. This act allowed eligible employers to claim a credit against 70% of the qualified wages paid.
However, there was a cap of $10,000 for each employee for the first two quarters of 2021. That means employers could save up to $28,000 per employee. As you can see, that way is a lot more than the initial amount provided in the CARES Act.
Finally, there’s the American Rescue Plan from 2021. This act essentially extended the Consolidated Appropriations Act to the end of 2021. It did this to help businesses that were devastated by the pandemic.
However, the difference is that it includes start-up businesses that were started after Feb. 15, 2020, and that made $1 million or less in gross receipts. These types of businesses were originally excluded.
What Employers Are Eligible?
Now that you know more about the different acts that have provided employee retention credits you’re probably wondering whether or not you qualify for them. Well, the good news is that most businesses, whether they be hospitals, universities, or 501(c) organizations will qualify.
However, two strict conditions need to be met. Only one of these two conditions needs to be met. So, if you don’t qualify for one, then you might be able to for the other. First, the organization or trade has to be either fully or partially suspended.
This means that they were forced to reduce business hours due to government intervention. Additionally, the credit only applies to the quarter in which the business was properly suspended. That means that it doesn’t count for the entire quarter.
Sadly, that means that businesses that were shuttered, but continued through teleoperations don’t apply through this condition. In addition, essential businesses also don’t apply. However, this isn’t true if your supply chain was interrupted in a way that makes it difficult to keep operating.
If you don’t qualify for this first condition, then don’t panic. There is another condition you can meet. You may also still apply for employee retention credit if your business experienced a significant amount of decline.
This decline needs to be measurable in gross receipts. However, it’s important to note that employers must apply for safe harbor across all entities, including the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act from 2020, the Consolidated Appropriations Act from 2021, and the American Rescue Plan.
Let’s take a closer look at what the looks like in terms of gross receipts.
Coronavirus Aid, Relief, and Economic Security Act (CARES) Act
With this entity, your gross receipts for the specific quarter must be 50% below the gross receipts from the same calendar quarter in 2019. In addition to this, they are not eligible if their gross receipts for the next quarter exceed 80%.
This would mean that their business bounced back after initially stumbling.
Consolidated Appropriations Act
At the start of 2021, a business must show that quarantine or closures caused a 20% or more drop in gross receipts. This is compared to the gross receipts in the same quarter of 2019.
But what should you do if you’re a new business that didn’t start in 2019? If that’s the case, then the IRS allows you to use the receipts from the quarter when you started the business. This can be used as a reference because your business was not around in 2019.
American Rescue Plan
The American Rescue Plan follows the same eligibility requirements found in the Consolidated Appropriations Act. However, it also gives businesses some additional options.
Alternatively, businesses can have the option for determining eligibility based on the gross receipts from the calendar quarter that immediately proceeded it.
In addition to this, the American Rescue Plan states that certain businesses are entitled to a maximum of $50,000 per quarter. However, to qualify the business must satisfy all of the following requirements:
- The business needs to have started after February 15, 2020
- The gross receipts of the business cannot exceed $1 million
- The business must not be eligible for employee retention credit under the other two categories.
What Wages Can You Count In the Retention?
Before you can determine what wages are counted you must first determine how many full-time employees you have working for you. So what is a full-time employee?
A full-time employee is someone who works at least thirty hours per week or one hundred thirty hours per month. This can be in any given calendar month of 2019.
If you were in business during the entirety of 2019 or 2020, then you can find the number of full-time employees by taking the sum of full-time employees and dividing it by twelve.
If you started your business in 2019 or 2020, then you can find the number of full-time employees by taking the sum of full-time employees and dividing it by the number of months you were open.
Similarly, if you started your business in 2021 then you can find the number of full-time employees by taking the sum of full-time employees and dividing it by the number of months you were open
Coronavirus Aid, Relief, and Economic Security Act (CARES) Act
Under the CARES Act if you have more than one hundred employees, then there are limits on the qualified wages you can use, You can only use the wages of employees who are not providing services.
This can be either because of suspension or just a decrease in business. In addition to this, you cannot use any wages that were paid for sick days, vacation days, or similar days off. So, essentially you can only use the wages of employees who aren’t working.
If your business has less than one hundred employees, then you can use all employee wages. This includes people who are working as well as those on paid leave.
Consolidated Appropriations Act
The only difference between the CARES Act and the Consolidated Appropriations Act in terms of wages counted is the number of employees.
The Consolidated Appropriations Act increased the number of employees to five hundred when determining eligibility for the wages. This helped benefit some of the larger businesses that were affected
American Rescue Plan
The American Rescue Plan attempts to benefit businesses that have been hit hardest by the economic impact of the pandemic.
As such, if your gross receipts were less than 10% of what they were in the previous 2019 and 2020 quarters, then you’re allowed to claim the credit on all employee’s qualified wages.
That includes the ones who were providing services. However, keep in mind that it only applies to the third and fourth quarters of 2021.
How Do You Apply If You’re An Eligible Employer?
If you’re still eligible for employee retention credit, then you’re probably wondering how you can start taking advantage of them. The easiest way is to self-report the tax credits to the IRS.
You can do this by filling out Line 13 of Form 941 when filing taxes for your busy. However, for some people, their tax credits might be more than their tax bills. If you fall in this category, then fill out Form 7200 instead.
This will apply and additional credits you might have to a check will be sent to you. If you’re worried about reporting your tax credits and making a mistake, then don’t panic.
The good news is that there are a variety of accounting services that can help make sure that you’re doing it the right way. Some, like ERC Today, specialize in reporting ERC. As such, you can rely on them for your needs.
Not only does it take the stress away from you in reporting, but it also ensures that it’s done correctly.
How Do the Credits Work?
It’s important to remember that the tax credit will be claimed against Medicare taxes. This is a noticeable difference from 2020 when they were claimed against Social Security taxes.
Just keep in mind that this only applies to wages that were paid after the date of June 30, 2021. Otherwise, there will be no changes to the credit amount.
Want More Content? Keep Reading
We hope this article helped you answer the question, What is employee retention credit? As you can see, it’s not too late to take advantage of the employee retention credit. All you need to do is amend your Quarterly Form(s) 941 if you qualify for it.
If you aren’t sure whether or not you qualify for it, then consider contacting a professional accountant. They can walk you through whether or not you qualify and how much you can expect to save.
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