Employee Retention Credit : What it is and How to Claim

Employee Retention Credit is a tax incentive provided by the Internal Revenue Service to encourage businesses to retain employees in difficult times such as economic disruptions and government-mandated shut downs. The credit was created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES) in response to COVID-19.

The ERC allows businesses that qualify to claim a refund of tax on certain wages paid to their employees. The credit amount is based on the percentage of qualified wages up to a certain limit per employee and quarter. Qualified wages vary depending on the size and eligibility criteria of your business.

In this article, we will discuss many aspects of ERC.

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) is a tax credit introduced by the U.S. government to help businesses retain their employees during challenging times, such as the COVID-19 pandemic. It was created as a part of the CARES Act in 2020 and has been extended and expanded in subsequent legislation. The ERC aims to provide financial relief to eligible employers and encourage them to keep their workforce intact.

The credit is refundable, meaning that if the amount of the credit exceeds the employer’s payroll tax liability, the excess can be received as a cash refund. This makes the ERC particularly valuable for businesses facing financial difficulties.

To claim the ERC, eligible employers need to meet certain criteria and follow the guidelines set by the Internal Revenue Service (IRS). By taking advantage of the ERC, businesses can receive substantial financial support while retaining their valuable employees.

How Do the Employee Retention Credit Work?

The ERC allows eligible employers to claim a percentage of qualified wages paid to their employees as a tax credit. The credit amount is calculated based on qualified wages and is subject to certain limits.

The ERC is equal to 50% of qualified wages paid between March 13, 2020, and December 31, 2021. However, under the American Rescue Plan Act, passed in March 2021, the ERC was extended and expanded. From January 1, 2021, to June 30, 2021, eligible employers can claim up to 70% of qualified wages per employee, with a maximum of $10,000 in qualified wages per employee per quarter.

Starting July 1, 2021, and until December 31, 2021, eligible employers can claim up to 70% of qualified wages per employee per quarter, with a maximum of $10,000 in qualified wages per employee per quarter.

It’s important to note that the ERC can be claimed for qualified wages paid during periods when the business was either fully or partially suspended due to government orders or experienced significant declines in gross receipts compared to the same quarter in the previous year.

Who qualifies for the employee retention credit?

To qualify for the ERC, businesses need to meet specific eligibility criteria. The following conditions must be met:

1. Full or partial suspension: The business operations were fully or partially suspended due to government orders related to COVID-19. For example, a restaurant that was forced to close its dine-in services but continued offering takeout would qualify.
2. Decline in gross receipts: The business experienced a significant decline in gross receipts. The threshold for this decline differs depending on the period being considered. For 2020, a decline of 50% or more in gross receipts compared to the same quarter in 2019 qualifies a business. For 2021, this threshold was reduced to 20% or more.
3. Employer size: The size of the employer determines whether wages paid to all employees or only those who are not working due to suspension or reduced hours qualify for the credit. Businesses with 100 or fewer full-time employees can claim the credit for all wages paid to both working and non-working employees. For businesses with more than 100 full-time employees, the credit can only be claimed for wages paid to non-working employees.

How to apply for employee retention credit?

To apply for the Employee Retention Credit, eligible employers must file the appropriate forms with the IRS. The exact process and forms required may vary based on the specific circumstances of the business. However, the general steps to claim the ERC are as follows:

1. Determine eligibility: Review the eligibility criteria provided by the IRS to ensure that your business meets the requirements for claiming the credit.
2. Calculate the credit: Calculate the amount of the credit you are eligible to claim based on the qualified wages paid to your employees during the designated periods.
3. File the necessary forms: Fill out the appropriate forms to claim the ERC. For most eligible employers, this involves including the credit on their employment tax return, such as Form 941, Employer’s Quarterly Federal Tax Return.
4. Retain documentation: Keep all necessary documentation and records to support your ERC claim. This includes records of the qualified wages paid, the period of suspension or decline in gross receipts, and any other relevant information.
5. Seek professional assistance: Consider consulting with a tax professional or utilizing the services of reputable ERC filing companies to ensure accurate and timely filing of your ERC claim.

For detailed guidance and the specific forms required for claiming the ERC, it is recommended to refer to the official website of the Internal Revenue Service (IRS) at www.irs.gov.

Is the employee retention credit taxable income?

No, the Employee Retention Credit is not taxable income for businesses. It is a tax credit designed to provide financial relief to eligible employers, and it does not need to be included as taxable income when calculating federal income tax.

The ERC is a credit against the employer’s portion of Social Security taxes (also known as the Federal Insurance Contributions Act or FICA taxes). If the amount of the credit exceeds the employer’s payroll tax liability, the excess can be received as a cash refund.

Can I claim employee retention credit and PPP?

Yes, businesses can claim both the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP) loan. However, there are specific rules and limitations to prevent double-dipping or overlapping benefits.

Under the initial legislation, businesses were not allowed to claim the ERC if they received a PPP loan. However, this restriction was lifted with the Consolidated Appropriations Act of 2021, allowing businesses to retroactively claim the ERC for qualified wages that were not used as payroll costs in obtaining forgiveness of the PPP loan.

However, there is one important limitation. Wages used to calculate the ERC cannot be included in the calculation of payroll costs for PPP loan forgiveness. This means that if an employer claims the ERC for certain wages, those wages cannot be used as eligible expenses for PPP loan forgiveness.

It’s essential to consult with a tax professional or a reputable ERC filing company to ensure compliance with the rules and maximize the benefits of both programs.

Top 3 Best Employee Retention Credit Services

When it comes to claiming the Employee Retention Credit, businesses can benefit from the expertise of professional services that specialize in ERC filings. Here are three reputable companies that provide ERC services:

1. RKL LLP: RKL LLP is a professional services firm that offers ERC services. They have a dedicated team of tax professionals who specialize in ERC calculations and compliance. RKL LLP has been known for providing comprehensive ERC services, including eligibility assessment, credit calculation, and assistance with filing and documentation.
2. RSM US LLP: RSM US LLP is a leading tax consulting firm that has been recognized for its ERC services. They have a team of experienced tax advisors who can help businesses navigate the complexities of the ERC. RSM US LLP provides personalized solutions, including ERC eligibility evaluation, credit calculation, and guidance on claiming the credit.
3. Cherry Bekaert LLP: Cherry Bekaert LLP is a reputable accounting and advisory firm that has been acknowledged for its ERC expertise. They have a dedicated team of professionals who assist businesses in optimizing their ERC claims. Cherry Bekaert LLP offers comprehensive ERC services, including eligibility assessment, credit calculation, and assistance with documentation and filing.

It’s important to evaluate the specific services and expertise offered by each company to determine the best fit for your business’s needs. Additionally, consider reading reviews, testimonials, and checking their track record to make an informed decision.

How Does a Business Claim the Employee Retention Tax Credit Retroactively?

Under the provisions of the Consolidated Appropriations Act of 2021, eligible businesses have the opportunity to claim the Employee Retention Credit (ERC) retroactively for qualified wages paid in 2020, even if they previously received a Paycheck Protection Program (PPP) loan.

To claim the ERC retroactively, eligible businesses need to follow these steps:

1. Amend payroll tax returns: File amended employment tax returns, such as Form 941-X, for the relevant quarters in 2020. These amended returns will reflect the revised calculation of employment taxes after considering the ERC.
2. Claim the credit: On the amended returns, claim the ERC for the eligible wages paid during the applicable quarters in 2020. Calculate the credit based on the guidelines and limitations provided by the IRS.
3. Seek professional assistance: Consider engaging the services of reputable ERC filing companies or consulting with a tax professional to ensure accurate and compliant filing of amended returns and claiming the ERC retroactively.

It’s important to note that the deadline for claiming the retroactive ERC for wages paid in 2020 is generally within three years from the date the original employment tax return was filed or within two years from the date the tax was paid, whichever is later.

What Employers Qualify for the Employee Retention Credit?

Various types of employers can qualify for the Employee Retention Credit (ERC) if they meet the eligibility criteria set by the IRS. The following employers may be eligible to claim the ERC:

1. For-profit businesses: Eligible employers include both small and large for-profit businesses, including corporations, partnerships, and sole proprietorships. The size of the business, measured by the number of employees, determines which wages are eligible for the credit.
2. Tax-exempt organizations: Tax-exempt organizations under Section 501(c) of the Internal Revenue Code, such as nonprofit organizations, can also qualify for the ERC. These organizations must meet the criteria for full or partial suspension of operations or experience a significant decline in gross receipts.
3. Governmental employers: State, local, and tribal governments are eligible for the ERC, subject to specific rules. Governmental entities must experience a full or partial suspension of operations or a significant decline in gross receipts to qualify.

It’s important to review the specific guidelines and provisions outlined by the IRS to determine whether your business or organization qualifies for the ERC.

Consulting with a tax professional or reputable ERC filing company can provide further assistance in understanding eligibility requirements and maximizing the benefits of the credit.

What wages qualify when calculating the retention credit?

When calculating the Employee Retention Credit (ERC), not all wages paid to employees are considered qualified wages. The following types of wages are generally eligible for the credit:

1. Wages paid during a suspension: Wages paid to employees during a full or partial suspension of business operations due to government orders or other qualifying reasons are considered qualified wages. These include wages paid to both working and non-working employees.
2. Wages during a decline in gross receipts: Wages paid to employees during a calendar quarter in which the business experienced a significant decline in gross receipts are considered qualified wages. The decline in gross receipts must meet the specified threshold for the applicable period.
3. Health plan expenses: The portion of eligible health plan expenses allocable to the qualified wages can be included as part of the qualified wages for the ERC calculation. This includes both employer and employee contributions to health plans.

It’s important to note that the maximum amount of qualified wages per employee that can be taken into account for each quarter is $10,000. Additionally, qualified wages cannot include those taken into account for other tax credits, such as the Work Opportunity Tax Credit or the Paid Sick and Family Leave Credits.

Are Tipped Wages Included in Qualified Wages?

Yes, tipped wages can be included as part of the qualified wages when calculating the Employee Retention Credit (ERC) under certain conditions. The treatment of tipped wages for ERC purposes is as follows:

1. Tipped employees: For employers who have employees who receive tips, such as restaurant servers, bartenders, or other service industry workers, the tips themselves are not considered qualified wages for the ERC calculation. However, the wages paid by the employer to these tipped employees can be considered qualified wages.
2. Allocating and calculating tipped wages: To include tipped wages in the ERC calculation, the employer must allocate and calculate the amount of wages paid to the tipped employee, including tips received. The wages paid by the employer must be at least equal to the applicable minimum wage, excluding tips.
3. Documentation requirements: Employers should maintain accurate records and documentation to support the allocation and calculation of tipped wages for ERC purposes. This includes records of hours worked, tips received, and wages paid by the employer.

It’s important for employers with tipped employees to ensure proper documentation and compliance with IRS guidelines when including tipped wages in the ERC calculation. Consulting with a tax professional or reputable ERC filing company can provide further guidance and assistance in handling tipped wages for the credit.

Are Owner/Spouse Wages Included in Qualified Wages?

In certain circumstances, wages paid to owners or their spouses can be included in qualified wages when calculating the Employee Retention Credit (ERC). The treatment of owner/spouse wages for ERC purposes is subject to specific rules:

1. C-Corporation owners: Wages paid to owners of C-Corporations, including certain corporate officers and shareholders, are generally eligible to be considered as qualified wages for the ERC. However, there are limitations based on ownership percentages and family relationships.
2. S-Corporation owners: Wages paid to owners of S-Corporations, including certain shareholders, are not eligible to be included as qualified wages for the ERC. This is because S-Corporation owners typically receive distributions of profits instead of wages.
3. Partnerships and sole proprietors: Wages paid to partners in a partnership or to a sole proprietor are not considered qualified wages for the ERC. This is because these entities do not pay wages to owners but instead report their income on the owner’s individual tax return.

It’s crucial for owners and businesses to consult with a tax professional or reputable ERC filing company to determine the eligibility of owner/spouse wages for the ERC calculation. The specific ownership structure, business entity type, and family relationships can impact the treatment of these wages.

What is the Interaction with Other Credits and Funding Sources?

When claiming the Employee Retention Credit (ERC), it’s important to understand the interaction of the credit with other tax credits and funding sources. Here are some key considerations:

1. Interaction with the Paycheck Protection Program (PPP): Under the Consolidated Appropriations Act of 2021, eligible employers can retroactively claim the ERC for qualified wages that were not used as payroll costs in obtaining forgiveness of a PPP loan. However, wages used to calculate the ERC cannot be included in the calculation of payroll costs for PPP loan forgiveness.
2. Interaction with other tax credits: The ERC cannot be claimed for wages that have been taken into account for other tax credits, such as the Work Opportunity Tax Credit or the Paid Sick and Family Leave Credits. Employers need to carefully assess the eligibility and interactions of various tax credits when calculating their credits.
3. R&D tax credits: Wages that qualify for the Research and Development (R&D) tax credit cannot be considered qualified wages for the ERC. Employers need to ensure that wages claimed for the ERC are not duplicative with the R&D tax credit.
4. State and local credits: Some states and local jurisdictions may offer their own employee retention credits or similar programs. Employers should consider the interaction and coordination of these programs with the federal ERC to maximize their benefits.

Understanding the interaction of the ERC with other credits and funding sources is essential for accurate calculations and compliance. Consulting with a tax professional or reputable ERC filing company can provide guidance specific to your business’s situation and ensure proper coordination of benefits.

What Businesses Should Know about ERTC Retroactive Termination Guidance?

The Employee Retention Credit (ERC) provides businesses with the opportunity to claim credits for qualified wages paid during specific periods. However, there are certain considerations related to retroactive termination guidance that businesses should be aware of:

1. Retroactive termination: The ERC allows eligible employers to claim credits for wages paid during periods when their operations were fully or partially suspended due to government orders or when they experienced a significant decline in gross receipts. However, if an employer retroactively terminates an employee during these periods, they cannot include wages paid to that employee after the termination date as qualified wages for the credit.
2. Reasonable anticipation: If an employer reasonably anticipates terminating an employee, the wages paid after that anticipated termination date are not considered qualified wages for the ERC. The IRS provides specific guidance on what qualifies as reasonable anticipation.
3. Documentation and records: It is crucial for businesses to maintain proper documentation and records to support their ERC claims. This includes documentation related to retroactive terminations, including termination dates and the impact on qualified wages.
4. Compliance and accuracy: Businesses should ensure compliance with the IRS guidelines and accurately calculate the ERC based on eligible wages. Engaging the services of reputable ERC filing companies or consulting with tax professionals can help ensure accurate calculations and proper compliance.

Understanding the retroactive termination guidance and its implications is important for businesses to maximize their ERC benefits while maintaining compliance with the IRS regulations.

Consulting with a tax professional or reputable ERC filing company can provide further guidance specific to your business’s situation.

How does a PEO client employer reconcile?

When a business is a client of a Professional Employer Organization (PEO), the reconciliation process for claiming the Employee Retention Credit (ERC) may involve cooperation and coordination between the PEO and the client employer. Here are some key considerations:

1. Allocation of qualified wages: The PEO and the client employer need to determine how to allocate the qualified wages between them. The IRS provides guidance on the allocation of the ERC among related entities, and this guidance can be applied to the PEO-client relationship.
2. Employer identification number (EIN): The PEO generally reports wages and employment taxes under its own EIN. However, for the purpose of claiming the ERC, the client employer may need to report and claim the credit under its own EIN. This requires coordination between the PEO and the client employer to ensure accurate reporting and claiming of the ERC.
3. Documentation and records: Both the PEO and the client employer should maintain proper documentation and records to support their respective ERC claims. This includes records of qualified wages, periods of suspension or decline in gross receipts, and any other relevant information.
4. Communication and cooperation: Open communication and cooperation between the PEO and the client employer are crucial for a smooth ERC reconciliation process. Both parties should collaborate to ensure accurate calculations, timely filing, and compliance with the IRS guidelines.

It’s important for businesses that utilize the services of a PEO to consult with the PEO and potentially seek the assistance of a tax professional or reputable ERC filing company to navigate the reconciliation process and ensure proper claiming of the ERC.

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Conclusion

The Employee Retention Credit (ERC) is a valuable tax incentive that aims to help businesses retain their employees during challenging times. Understanding the intricacies of the ERC can be complex, but with the right knowledge and assistance, businesses can take full advantage of this credit to reduce their tax liabilities and improve their financial position.

Throughout this article, we have explored various aspects of the ERC, starting with what it is and how it works. We discussed the qualifications for the credit, the application process, and the tax implications of claiming the ERC. Additionally, we examined the interaction of the ERC with other credits and funding sources, as well as specific considerations for retroactive termination and PEO clients.

While I provided examples of reputable ERC service providers in the past, it’s important to conduct your own research to find the best ERC service provider that meets your specific needs. Reputable firms like RKL LLP, RSM US LLP, and Cherry Bekaert LLP have been recognized for their expertise in ERC services, but it’s crucial to review their current offerings and client feedback to make an informed decision.

By engaging the services of knowledgeable ERC professionals or filing companies, businesses can ensure accurate calculations, proper documentation, and compliance with IRS regulations. These experts can navigate the complexities of the ERC, optimize the credit calculation, and assist in filing claims, ultimately helping businesses maximize their benefits.

The Employee Retention Credit presents a valuable opportunity for businesses to receive financial relief and support during challenging times. By leveraging this credit effectively, businesses can retain their valuable employees, reduce their tax burdens, and navigate through economic uncertainties with greater stability.

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