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What is the Employee Retention Credit and How to Get It?

Businesses that had their operation partially or fully suspended due to government shutdown orders, or have had a 50% decline in gross receipts compared to same quarter in 2019, may be able to claim the Employee Retention Credit (ERC) under the CARES Act.

The ERC encourages businesses to keep their employees on payroll. The refundable payroll tax credit is capped at 50% of wages up to $10,000 per employee. Both private sector businesses and tax-exempt organizations of any size may claim the credit as long as they continue to carry on a trade or business.   

Qualified wages, which includes employer paid health plan expenses, are wages paid after March 12, 2020 and before January 1, 2021.  For businesses that had, on average, less than 100 full-time employees in 2019, the credit is based on wages paid to all employees, regardless if they worked or not.  If the business had more than 100 full-time employees the credit is allowed only for wages paid to furloughed employees.

Businesses that received a Paycheck Protection Program Loan (PPP Loan) are not eligible for the ERC. Additionally, wages counted for this Credit cannot include the same wages which the employer received a tax credit for, paid sick and family leave under the Families First Coronavirus Response Act, or an employer credit for paid family and medical leave under IRC Section 45S.

To claim the ERC, eligible employers will use Form 941 to report their total qualified wages and related health insurance costs for each quarter. The credit is taken against the employer’s share of social security and Medicare taxes. Employers can also use Form 941 to take into account any reduction in wages under the FFCRA paid sick and family leave credit.  An advance of the credit is available by submitting Form 7200.

Expansion of the ERC. Lawmakers are hoping to expand the credit. If passed, the HEROES Act would increase the Credit amount from $5k to $36k per employee.  The Credit would be extended to allow businesses that have received a PPP loan to qualify. Additionally, the bill would increase the 100 full-time employee rule for determining qualified wages to 1,500 employees and gross receipts greater than $41.5 million in 2019.

Additional Resources:

https://www.irs.gov/coronavirus/employee-retention-credit

https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act

https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs

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