The Employee Retention Credit: What You Need To Know About This Refundable Payroll Tax Credit

The Employee Retention Credit (“ERC”) continues to provide a wide variety of employers with lucrative refundable payroll tax credits for qualified wages paid to employees in 2020 and 2021. Businesses can still apply for the ERC by filing an amended Form 941X (Quarterly Federal Payroll Tax Return) for the quarters during which the company was an Eligible Employer.

How does the Employee Retention Credit work?

The ERC is a refundable payroll tax credit that can be as high as $5,000 per employee in 2020 and as high as $21,000 per employee in 2021.

Who qualifies for the Employee Retention Credit?

Employers that experienced partial shutdowns due to government orders limiting commerce, travel or group meetings; or that experienced significant declines in quarterly gross receipts (as compared to their quarterly gross receipts in 2019) due to the pandemic are eligible employers under this program.

What are ERC qualified wages?

ERC credits are calculated based on the qualifying wages paid to employees during eligible employer status. For most companies taking advantage of this program, the refundable tax credits are well in excess of the payroll taxes paid by the employers. ERC benefits can be larger than the amounts a company received in PPP funding.

Are the benefits of the Employee Retention Credit the same for large and small employers?

Small employers receive enhanced benefits under the ERC regime. Specifically, for the time they are an Eligible Employer, they can include wages paid to all employees. Large employers can only include wages paid to employees for not providing services.

Is the Employee Retention Credit only for full-time employees?

No. An employer may include wages paid to part-time and full-time employees in the calculation of the ERC. The only limitation on the calculation of the credits is that an employer may only calculate the credits on the first $10,000 of wages and health plan costs paid to each employee during each credit-generating period.

How do I calculate if an employer is a large or small employer for the Employee Retention Credits?

For the 2020 ERC, an employer with 100 or fewer average full-time employees (as measured in 2019) is defined as a small employer.

For the 2021 ERCs, an employer with 500 or fewer full-time employees (as measured in 2019) is defined as a small employer.

The term “full-time employee” means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week), as determined in accordance with section 4980H of the Code. An employer that operated its business for the entire 2019 calendar year determines the number of its full-time employees by taking the sum of the number of full-time employees in each calendar month in 2019 and dividing that number by 12. Special rules apply to those who were not in business all of 2019.

If I qualify under the Government Mandate Test, does that automatically qualify me as an eligible employer for the entire quarter?

Technically, yes, but you only pay qualifying wages while the mandates are in effect and they are having a more than nominal impact on the business.

Do I need to file for PPP forgiveness before I file for the ERC?

No, but, if possible, allocate the maximum available non-wage allowable costs to the PPP being forgiven

Can I get both the ERC and PPP Loan?

Yes. While an employer may not include wages funded by a PPP loan in the ERC calculation, PPP funds only apply to eight to ten weeks of wage expenses. The ERC eligibility periods are longer. PPP loans can also fund non-wage expenses.

For ERC purposes, it is most important to develop work papers that allocate the PPP funding across the entire 24 week covered period.

PPP funding may be allocated to wages that would not generate any ERC (e.g., to owners of the company or to wages in excess of $10,000 in one of the four ERC credit-generating periods).?

Your Next Step: Find Out if You're Qualified for ERC Funds

Our team of experts is available to help you to find out if you would be qualified for ERC. ?? Call us now to speak with a licensed tax agent 866-900-9001 -- or send a message for a free consultation: https://taxresolutionplus.com/contact.html