Employee Retention Credit: Five Frequently Asked Questions
During COVID-19, there were 18.1 million unemployed individuals, 63% were unable to work because their employer had closed or experienced a drop in business. Because of the employer’s use of the Employee Retention Credit, many jobs and businesses have survived (ERC).
Whether your company is a recipient of this credit, you might want to take a look back to see if you are eligible for any other credits. There is still time to apply if you are not aware of this benefit.
For answers to the most frequently asked questions about employee retention credits, keep reading.
1. What Exactly Is the Employee Retention Credit (ERC)?
The CARES Act, which provides relief for COVID-19, includes the ERC (Coronavirus Aid, Relief, and Economic Security Act). The Consolidated Appropriations Act made it larger, and the American Rescue Plan Act of 2021 made changes.
The employee retention tax credit’s goal is to assist employers in keeping workers on the payroll throughout COVID-19. It offers a sizeable, completely refundable tax credit to small and medium-sized businesses.
The ERC is equal to up to 50% of an employee’s qualifying salary for the 2020 calendar year. This includes charges for health insurance. Wages paid between March 12, 2020, and November 1, 2021, are eligible for the credit.
The maximum credit per employee each quarter is $5,000 (or 50% of $10,000 in salary). The maximum credit per employee per quarter is $15,000.
The credit for 2021 is equivalent to 70% of each employee’s quarterly pay up to a maximum of $10,000. There might be a credit of $28,000 for each worker. Due to program adjustments, this later decreased to $21,000 per worker per year in 2021.
The business receives a credit that cancels out all federal withholdings. This covers Medicare withholding, employer FICA, and federal income tax withholding.
2. How Can a Company Apply for ERC?
The company or nonprofit must go through one of the following during the calendar years 2020 or 2021 to be eligible:
- Business disruptions, including cuts to services, the supply chain, shortened hours of operation, etc.
- Government COVID-19 orders for a full or partial company shutdown
- 50% drop in revenue starting on or after March 13, 2020
- 20% less in terms of revenue for 2021
You must contrast each quarter’s 2020 or 2021 receipts with those from the corresponding quarter in 2019 to determine the drop in gross receipts.
When the government places restrictions on a business’s ability to operate at full capacity, that firm’s operations are partially suspended. This might happen as a result of restrictions on trade, gatherings of people, or travel. For non-essential companies, it may also be a “stay at home” order.
3. Can I apply for both the PPP and the ERC?
Employee Retention Credits and the Payment Protection Program both fall under the umbrella of help.
The Payment Protection Program is a loan that the SBA has sponsored. Its goal is to assist small enterprises in maintaining employment amid the COVID-19 pandemic. On May 31, 2021, the program came to an end, but current borrowers may still be able to request PPP loan forgiveness.
As part of a COVID relief plan, companies with 300 or fewer employees and an existing PPP loan are permitted to take a second draw. The loan terms for the second draw are the same as those for the first loan. Additionally, the company must demonstrate a drop in gross receipts of 25% or more for comparable 2019 quarters to qualify.
The PPP loan’s funding can be used to:
- Rent, mortgage, or lease payments
- Spending on operations
- Spending on worker protection is required to comply with COVID-19
- Insurance does not cover costs for property damage caused by public disturbances.
Employers may be eligible for ERC even if they have a PPP loan thanks to Sections 206 and 207 of the Taxpayer Certainty and Tax Relief Act (2020).
4. What Do Qualifying Wages Mean?
The definition of a qualifying wage is governed by rules. Employers who take out PPP loans who were earlier ineligible for ERC are now eligible.
Wages paid during a calendar quarter in which the business halted operations between March 13, 2020, and December 31, 2021, are considered to meet the requirements. The same regulations apply to qualified medical expenses as to qualified wages. Including pretax contributions from both the employee and the employer.
The quantity of full-time workers employed by the company determines the qualifying pay. A comparison between 2020 and 2021 is the variable.
Companies with 100 or more full-time employees in 2019 may evaluate the earnings of employees who are not working due to closure or a downturn in business in 2020.
All employee earnings can be claimed as qualifying in 2019 by businesses with fewer than 100 full-time employees. This includes compensation for time worked but not received due to a halt or reduction in operations.
An employer who has more than 500 full-time employees in 2019 is eligible to claim the credit in 2021. The credit is for wages paid to workers who were unable to work due to a decline in income or required closures.
The credit is valid against all employee wages during periods of a reduced revenue or required shut down if the company has less than 500 employees in 2019.
IRS FAQ No. 59
Along with the figures, IRS FAQ #59 identifies particular individuals who are not qualifying employees:
- Members of the same family as the deceased kid, such as siblings, children, parents, and grandparents
- Mother, father, sibling
- Stepmother, stepfather, stepsister, and stepbrother
- Son-in-law, daughter-in-law, brother-in-law, sister-in-law, in-law mother
Self-employment earnings are additionally ineligible. The same is true for earnings paid to a spouse, ancestor, or any other person who fits the definition of indirect ownership.
5. Will ERC Be Offered in 2022?
The short answer is that you can submit an ERC application in 2022. The government gives businesses three years to review salaries received if you didn’t apply. This applies to any wages you gave workers after March 12, 2020.
You may submit an amended Form 941X, Quarterly Federal Payroll Tax Return if you decide that you are eligible. For each quarter that you are qualified for credit, a separate form needs to be submitted.
If you think you could qualify, speak with an ERC expert as soon as you can. Due to the changes made in 2021, there is a backlog of revised Form 941-X submissions with the government.
It takes 6 to 10 months to process amended tax returns that are already on file with the IRS. The projected wait period for individuals who file right away is at least 16 months.
FAQs Regarding Employee Retention Credit
You might have other inquiries or worries about eligibility now that we have addressed the most frequently asked issues concerning the Employee Retention Credit. You can get the assistance you need from ERC Today to apply for or make changes to your Employee Retention Credit and Paycheck Protection Program paperwork.
We will do a free first review of your company to determine your eligibility and the estimated amount of credit you are owed. We take a cut of the IRS employee retention credit you receive if you choose to use our help in filing for the ERC.
Find out what credits your company qualifies for and how we can help by getting in touch with Your Part Time Accountant right away.