The Employee Retention Credit (ERC) is a tax credit introduced by the U.S. government to provide financial relief to businesses during the COVID-19 pandemic. The credit is designed to encourage employers to retain their employees and continue paying wages, even if their operations have been significantly impacted.
Here are the basics of the Employee Retention Credit:
Eligibility:
1. Employers: The ERC is available to both private sector businesses and tax-exempt organizations. Government entities and small businesses that received Paycheck Protection Program (PPP) loans are generally not eligible.
2. Operational status: Eligible employers must have experienced one of the following during the specified periods:
– Fully or partially suspended operations due to a government order related to COVID-19.
– A significant decline in gross receipts. For 2020, a decline of 50% or more in gross receipts compared to the same quarter in the previous year. For 2021, a decline of 20% or more is required.
Credit Amount:
1. 2020: The ERC is equal to 50% of qualified wages paid to eligible employees, up to $10,000 of wages per employee. This makes the maximum credit per employee $5,000 for the year.
2. 2021: The ERC is increased to 70% of qualified wages, up to $10,000 per quarter per employee. This makes the maximum credit per employee $26,000 for the year.
Qualified Wages:
1. 2020: Qualified wages include wages and certain health plan expenses paid to employees during the period of eligibility. For employers with more than 100 full-time employees, qualified wages are limited to wages paid to employees who are not providing services due to suspension or a decline in business.
2. 2021: Qualified wages include wages and certain health plan expenses paid to employees, regardless of the number of employees.
Claiming the Credit:
1. 2020: Employers can claim the credit on their quarterly employment tax returns (Form 941) or request an advance payment.
2. 2021: Eligible employers can claim the ERC for each calendar quarter by reducing their required employment tax deposits or requesting an advance payment.
Interaction with PPP Loans:
Initially, employers who received PPP loans were not eligible for the ERC. However, the Consolidated Appropriations Act of 2021 and subsequent legislation changed this provision. As of the knowledge cutoff date in September 2021, employers can retroactively claim the ERC for qualified wages not used to support PPP loan forgiveness.
It’s important to note that the details and eligibility criteria of the Employee Retention Credit may change over time. It’s advisable to consult with an ERC tax professional or refer to the latest guidance from the Internal Revenue Service (IRS) for the most up-to-date information.
