The Coronavirus Aid, Relief, and Economic Security (CARES) Act, was among the government’s first legislative responses to the pandemic. The main goal of the legislation was to reduce the economic impact of COVID-19 on people and businesses across the country. One key focus of the law was helping companies stay in business and keep workers on the payroll. Two of the methods for achieving this goal was the Paycheck Protection Program and the Employee Retention Credit.

While these programs have ended, companies still have time to claim the ERC. Since the credit can add up to thousands of dollars, it pays to understand what it is, how it works and the process needed to take advantage of the program.

What is the Employee Retention Credit?

The ERC is a payroll tax credit created by the CARES Act in March of 2020. The purpose of ERC was to help companies keep workers on the payroll, and off unemployment, during the pandemic. It has been amended several times since being signed into law, most recently through the Infrastructure Investment and Jobs Act signed by President Biden on Nov. 15, 2021.

It is important to understand that the ERC is not a loan or a deferral, and it does not have to be repaid. It is a tax credit that eligible companies can claim against payroll tax deposits, reducing their tax burden and increasing their operating cash. In some cases, eligible companies can request an advanced payment of the credit. 

Overview of eligibility requirements for the Employee Retention Credit

There are guidelines for determining which companies are eligible for the credit, as well as differences in how eligible companies calculate the credit amount. Determining eligibility starts by demonstrating that a company has experienced one of the following situations during 2020 and/or 2021.

• The company experienced a full or partial suspension of operations due to orders from a government authority that resulted in reduced commerce. The credit would only apply to quarters for which the business experienced the suspension.
• The company experienced a significant decline in gross receipts during the calendar quarter for which the credit is calculated. This is defined as a 20% reduction of revenue as compared to the same quarter in 2019.

Companies do not have to demonstrate both conditions to be eligible but must be able to show proof that they experienced one or the other. 

And while non-profits and companies of any size may qualify if they meet the required criteria, there are some organizations that are not eligible. Federal and state government organizations are not eligible, nor are organizations created by or pursuant to state law and operated for public purposes. Tribal government and tribal entities are an exception and can claim the credit if they meet eligibility requirements.

Self-employed individuals cannot take the credit for their own earnings but may be able to claim it for wages they paid to employees. Companies that received a Paycheck Protection Program loan may qualify, even if they have received forgiveness. In this instance, the tax credit cannot be claimed against the wages used for loan forgiveness.

Determining the Employee Retention Credit amount

The tax credit for 2020 is equal to 50% of up to $10,000 of qualified wages, including some health plan costs, paid to employees from March 12 through the end of 2020. The maximum credit during this time period is $5,000 per employee for all of 2020.

In 2021, the tax credit is 70% of up to $10,000 of qualified wages per quarter, including some health plan costs, that an employer paid to employees from Jan. 1, 2021 through Nov. 30, 2021. The maximum credit during this time period is $7,000 per employee per quarter.

Determining the amount of the tax credit can be complicated and requires key pieces of company information, including:

• Quarterly payroll tax returns for eligible quarters;
• Summary of quarterly revenue;
• Employee wage details along with dates;
• Summary of lines of business (i.e. line of business, services and products);
• Details regarding wages used for Paycheck Protection Program and amount forgiven, if applicable; and
• Detail regarding wages to paid to employees for time spent not working.

Qualified wages are wages subject to Federal unemployment taxes, and health insurance benefits paid by the employer on behalf of qualified employees.

How to claim the Employee Retention Credit

Companies claim the credit by reducing required payroll tax deposits on social security, medical and federal taxes. This must be accounted for on quarterly Form 941 filings. If the expected credit exceeds filings, an advance can be requested by submitting Form 7200, Advance of Employer Credits Due to COVID-19. This must be done before the end of the quarter the credit is claimed for and must then be accounted for on Form 941 for that quarter. The IRS will receive and process these advance requests and send a check when completed. For 2021, companies with over 500 employees are not eligible for an advance against the credit.

Employee Retention Credit Time Limit

While the program itself ended at the end of November 2020, there is still time to take advantage of it. This is because the law allows three years to file Form 941-X, which is a correction of previously submitted Form 941. This allows companies to calculate the credit, file the corrected form and reduce tax deposits accordingly and file for several more years. 

There are a couple period of limitations to keep in mind for submitting corrected:

• Three years from date of original Form 941 filing; and
• Two years from date taxes reported on Form 941 were paid.

Is it worth the effort?

The Employee Retention Credit can represent a significant amount of money, but it can also take a significant amount of work to claim. The easiest part of the process is to determine eligibility, after that is where things can get complicated. Not only does the credit have to be calculated accurately for each qualifying quarter, amended quarterly returns must be filed and monitored until it has been processed by the IRS. 

In spite of the time and effort required, the credit can quickly add up and benefit companies in several different ways. If the calculated credit is less than expected tax liability, the credit can provide a notable tax break and immediately boost in cash flow. If the credit amount exceeds tax liability, the IRS will issue a check to the company.

Example:
A 10-employee company that was eligible all of 2020 and the first two quarters of 2021 can receive $19,000 per employee, totaling $190,000 in ERC.

This shows the potential money on the table for eligible companies that are willing to do the work to claim the credit. It also illustrates how beneficial the program can be for smaller companies.

Companies that do not feel confident calculating and claiming the credit can get help either through their tax advisor or an independent company set up to handle the process. This can make it simple to take advantage of the program and can maximize the credit amount. Just be sure that the company or person handling the credit has a great deal of experience helping companies with tax issues.

The Employee Retention Credit can be complicated to calculate, especially if a business received forgiveness for a PPP loan. It is worth the effort, however, because it can free up a substantial amount of money that can be put in the bank, used to reduce debt or leveraged to fund growth. Those that are uncertain about how to handle the credit are advised to consult with a tax professional to look closely into eligibility, calculate and assist in correctly claiming the credit.