Business Should Take A Second Look at Employee Retention Credits
In March 2020, the CARES Act § 2301 approved an Employee Retention Credit for qualified wages paid to help businesses recover some of the cost of keeping employees on the payroll rather than laying them off during the COVID Pandemic. As part of the Biden Administration’s Infrastructure Investment and Jobs Act, the Employee Retention Credit (ERC) program retroactively ended for most businesses on September 30, 2021. The good news is that eligible employers that did not claim the ERC on their original return can claim the ERC retroactively.
The ERC period for qualified wages was extended two times in 2021 to cover the entire 2021 calendar year. However, the Investment and Jobs Act (IIJA) retroactively excluded the fourth quarter of 2021 for all businesses except recovery startup businesses. The ERC period ended September 30, 2021, for most businesses. However, companies may be able to retroactively claim the ERC and have up to three years from the stated program end to determine if wages they paid after March 12, 2020, are eligible through the end of the program.
How Does the Retroactive Employee Retention Credit Work?
Eligible employers can file an Amended Employer’s Quarterly Tax Return or Claim for Refund.
For 2020 and the 2021 period from March 12, 2020 to December 31, 2020, the ERC is applied up to 50% of the first $10,000 of qualified wages paid to employees per quarter.
The American Rescue Plan Act of 2021 changed how the ERC was applied. From January 1, 2021 – December 31, 2021.
If the ERC benefit is higher than the amount of payroll taxes you paid, you receive a refund of the difference. You would not only receive the amount you already paid but also receive a check for the excess credit amount!
How much is the ERC worth?
The ERC is not a loan or a stimulus check. It is not considered taxable income. The ERC is a tax credit that can offset a portion or all the payroll taxes due by an eligible employer. It can even exceed payroll taxes owed, which means money refunded to you.
In 2020, eligible employers may take up to a maximum ERC of $5,000 per employee per year. In 2021, the maximum ERC was increased to a maximum of $7,000 per employee per calendar quarter. However, recovery startup businesses are limited to an ERC of up to $50,000 per calendar quarter.
The American Rescue Plan of 2021 added a provision for severely financially distressed employers. (SFDE) for the third and fourth quarters of 2021. SFDEs could treat all wages during the calendar quarter as qualified wages if they experienced a decline in gross receipts that were 10% less than their gross receipts in the same calendar quarter of 2019. The IIJA removed the allowance for SDFEs for the fourth quarter of 2021.
How does a business qualify as an Eligible Employer?
While many businesses are eligible for the ERC, not all companies can claim it.
Eligible Employers include:
Any employer operating a business, trade or a tax-exempt organization, but not governments or their agencies
For calendar quarters in 2021, the Relief Act of 2021 expanded eligible employers to include:
- Tax-exempt Organizations described in section 501(c)(1), and
- Colleges or universities whose principal purpose is to provide medical or hospital care
For the second half of 2021, the American Rescue Plan Act of 2021 expanded eligible employers to include recovery startup businesses. “Recovery startup businesses” are employers:
- That began operations after February 15, 2020, and
- That had average annual gross receipts under $1,000,000 for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined, and
- Do not meet the other eligibility criteria.
Eligible Employers must experience the following to meet eligibility requirements to qualify to receive the ERC:
- A shutdown of operations (complete or partial) due to a government order due to COVID-19 during any quarter, OR
- A substantial decline in gross receipts for any calendar quarter, where gross receipts are less than 50% of gross receipts for the same calendar quarter in 2019.
The Relief Act of 2021 amended the decline in gross receipts definition to “any quarter where gross receipts were less than 80% of the gross receipts in the same quarter in 2019.” Suppose an employer did not exist in 2019. In that case, the business may use any quarter where gross receipts were less than 80% of the the same calendar quarter gross receipts in 2020.
Please consult with our tax professionals about our simple, streamlined tax process to determine your business’s eligibility.
Not all wages are “Qualified wages.”
Qualified wages include all wages and health insurance benefits (including group health care benefits) paid to full-time and part-time employees of eligible employers during the eligibility period net of specific exclusions. Some exclusions include:
- Company owners cannot count their salary as a qualifying wage.
- Qualified wages cannot include sick and family leave wages for which an Employer already received an FFRC tax credit.
- Relatives with majority ownership in the business cannot add their salaries as qualified wages.
- Qualified wages cannot include wages for which the Employer received a tax credit under the Indian Employment Tax Credit.
If an employer averaged:
- More than 100 full-time employees in 2020, then only the wages for employees who were not working but were retained by the employer can be claimed for the ERC.
- The threshold was increased to more than 500 full-time employees in 2021.
- If an employer had less than 500 employees in 2021, working and non-working employees could be claimed for the ERC.
Employers should work with a certified tax professional to calculate qualified wages and health insurance costs for each quarter and report them on their amended tax returns.
Our simple online service will provide everything necessary to prepare and file an Amended Tax form to claim your employee tax credit. Developed by one of the top CPAs in Washington State, our service includes:
- Easy Process to Receive Your Refund
- Free 30- Minute Phone Consultation
- Scheduling a Video Filing Appointment for a convenient day and time
- Gathering the Documents requested to upload to our portal
- A summary email with forms to print, sign, and mail to the IRS.
Our ERC experts have been. Successful in getting businesses over $221 million in Employee Retention Credits. Don’t miss out on the Tax Credit you may be entitled! GET STARTED online or schedule a free consultation here.