It’s not too late to take advantage of the Employee Retention Tax Credit, a tool developed by lawmakers to help businesses keep employees on the payroll and survive the COVID-19 pandemic.

Originally part of the CARES Act, this tax credit reduces the employment tax deposits businesses typically pay for employees. The credit equals up to 50% of qualified wages paid between March 12, 2020, and January 1, 2021. The amount increases to 70% of qualified wages for the first three quarters of the 2021.

The tax credit covers qualified wages up to $10,000 per employee for all calendar quarters. This includes allocable qualified health plan expenses. 

What does this mean for you? For 2020, businesses can claim up to $5,000 per employee.  For 2021, the maximum credit per employee is $21,000 ($7,000 in Q1, Q2, Q3 of 2021), though businesses that started during the pandemic can claim all four quarters.

Who is Eligible?

Employers, including tax-exempt organizations, are eligible for the credit if:

  • they operated a trade or business during calendar years 2020 and 2021,
  • have fewer than 500 employees,
  • kept employees on the payroll during the pandemic,
  • the business was fully or partially shut down because of  a governmental order during any part of the quarter, or the business’s gross receipts in a quarter declined more than 50% (2020) or 20% (2021) when compared to either:

 (a) the same quarter in 2019 or

(b) the immediately preceding quarter in 2020 or 2021.

How is the Credit Calculated?

The credit applies to qualified wages including certain health plan expenses paid during this period or any calendar quarter in which an employer qualifies for the credit. The definition of qualified wages depends on the number of eligible employees.

If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not employees are providing services. This includes health care costs up to $10,000 per employee.

If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not employees are providing services. This includes health care costs up to $10,000 per employee.

If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally those wages —including certain health care costs up to $10,000 per employee— that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

Impact of Other Credit and Relief Provisions

An eligible employer’s ability to claim the Employee Retention Tax Credit can be impacted by other credit and relief provisions as follows:

  • Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act.
  • Wages counted for this credit can’t be counted for the credit for paid family and medical leave under section 45S of the Internal Revenue Code.
  • Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code for the employee.
  • Taxpayers who received a Paycheck Protection Plan loan can claim the ERC, excluding wages paid by the PPP loan.

Tax Considerations

“Employee Retention Tax Credit will be taxable income to the employer,” explains Andrew T. Walsworth, partner at BSC Group, LLC in Easton.  “The credit is a reduction in the wage expense of the employer.

“The reduction of salary expense will trail back to what tax year the wages were generated to claim the credit,” he continues. “For example, if an employer retroactively claims the Employee Retention Tax Credit for wages paid in 2020, the employer will need to amend the business tax filings for the 2020 tax year and pay any tax due as a result of the reduction in wage expense.”

Claiming the credit

To claim the ERC, eligible employers will amend their quarterly payroll tax returns using Form 941-X to report their total qualified wages and the related health insurance costs for each quarter the employer is eligible for ERC. Walsworth anticipates a six to nine month period for processing the credit and receiving a credit.

Because the rules have changed several times, it’s important to consult your tax professional or bookkeeper about the benefits to your business.

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