Employee Retention Tax Credit helps keep workers on the job

Editor’s Note: The article below was originally published on April 23, 2020. It includes updates from the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Act of 2021 approved on Dec. 27, 2020, and updates signed into law on March 11, 2021.

The coronavirus pandemic is taking a major toll on American businesses. With nationwide closures and dwindling sales, many businesses have seen devastating effects on their bottom line. Some are forced to change their workforce, or worse, close their doors.

Thankfully, in late March of 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to help those financially struggling due to the coronavirus. The bill has four important pillars for small business owners:

1. Paycheck Protection Program
2. Employee Retention Tax Credit
3. Payroll Tax Postponement
4. Economic Injury Disaster Loans

Each program was enacted to stimulate the American economy and help small business owners in economic need.

This post will cover details surrounding the Employee Retention Credit, or ERC. Read up to hear details about what it is, why it’s important, and other key guidance surrounding the credit now!

What is the Employee Retention Credit Program?

The Employee Retention Credit program works like a payroll tax credit. As the name implies, it’s a refundable tax credit that helps small businesses keep employees on their payroll.

Starting January 1, 2021 and through December 31, 2021, small business owners with a decline in gross receipts of 20% (previously 50%) year over year can claim a payroll tax credit for 70% of qualified wages up to $10,000 per employee per quarter (previously you claim 50% for the same amount per employee per year), including certain health benefits, paid to an eligible employee. Previously the deadline was June 30, 2021.

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What is the purpose of the ERC?

The ERC can help you keep your employees on the payroll if you’ve stopped doing business or significantly been affected financially.

This credit will continue to be refundable to employers with insufficient tax liability.

Who is eligible for the Employee Retention Credit?

The Employee Retention Credit is need-based, meaning your business will qualify if it took a hit financially due to the coronavirus. To be more specific, your business qualifies for this credit if:

• Operations were partially or fully stopped due to a shutdown order from a government entity; or
• Gross receipts for the quarter are less than 20% (starting January 1, 2021) of what they were last year in the same quarter. Once gross receipts go above 80% of a comparable prior year quarter, you are no longer able to qualify after the end of that quarter.

The ARP Act also expands eligibility for recovery startup businesses. A recovery startup business is one that began after February 15, 2020, has annual gross receipts of up to $1 million, and otherwise does not meet the eligibility tests. A startup ERC is limited to $50,000 per quarter per employer.

What does this credit cover?

The credit covers $10,000 of qualified wages per employee per quarter, at a maximum payroll tax credit of $7,000 per quarter (starting January 1, 2021). The credit is determined based on the amount of employment taxes paid by an employer on qualified wages paid for the calendar quarter. The qualified wages used for the credit cannot be counted for purposes of the paid family and medical leave or the work opportunity credit.

The credit also varies based on the number of employees you have. With the December CRRSA Act:

• If you employ 500 or fewer employees: All wages qualify, regardless of whether the business remains open or not.
• If you employ more than 500 employees: Wages for employees qualify if you continued to pay the employees, but they were not able to do their jobs due to business closure or reduction in gross receipts due to coronavirus impacts.

The previous employee threshold was 100 employees.

Employee Retention Credit guidance

Like other programs in the CARES Act, you need to follow specific instructions to claim it. To claim this credit, get educated on employee retention credit guidance. Unlike business loans, the Employee Retention Tax Credit isn’t applied for — it’s a credit on a business’ tax returns.

• Claim a credit advance on Form 7200. Before filing Form 7200, businesses may first reduce their employment tax deposits to account for the credit. Filing Form 7200 is optional, and business owners may do this prior to filing a payroll tax return and claiming a credit. After filing Form 7200, they can reconcile it on Form 941 when filing their most recent quarterly return. (Learn more: What is Form 941?)
• Business owners can claim the refundable credit on Form 941 to recover any payroll taxes already paid in the quarter.

Note: The tax credit is taken against an employer’s portion of required Social Security deposits. Business owners should also keep their share of Social Security tax already withheld (up to the credit amount) until it’s reconciled in their quarterly payroll tax return (Form 941).Beginning July 1, 2021, the credit would apply against the employer’s share of Medicare tax.

Employee Retention Credit (ERC) vs. Paycheck Protection Program (PPP)

Business owners that received a PPP loan can still take advantage of this credit as long as the wages used are not paid with PPP proceeds. Prior to the passage of CRRSA in December, business owners could not claim both the ERC and PPP. It’s also important to note that if you paid wages with a Restaurant Revitalization Grant or Shuttered Venue Operators (SVO) Grant assistance, you can’t use those wages to claim the ERC.

Employee Retention Credit example

If you’re thinking of taking the employee retention credit and need an example of how it’s used, look no further…

Sam is a small business owner based in Kansas who has experienced significant loss in her web design business due to the coronavirus. She has one employee, Ned, who is paid $2,000 per week, and he gets group health insurance. The cost to provide Ned insurance is $200 per week. In this case, the qualified wages for the Employee Retention Credit are $28,600 for the quarter, so Sam would be eligible to receive a $7,000 payroll tax credit. Keep in mind the credit would be limited to the payroll taxes paid for Ned’s wages. Any amount of excess Employee Retention Credit is refundable as an overpayment.

Where to go for more information

Need more information about the Employee Retention Credit? Rely on our team of small business certified tax pros to get your taxes right and keep your business on track. Connect with us at blockadvisors.com.

Looking for other updates about the latest small business stimulus relief? Check out our Guide to 2020 small business tax and stimulus relief for details.

Our small business tax professional certification is awarded by Block Advisors, a part of H&R Block, based upon successful completion of proprietary training. Our Block Advisors small business services are available at participating Block Advisors and H&R Block offices nationwide.