In this 7-minute read:
- What is the Employee Retention Credit?
- How much can an employer receive with the Employee Retention Credit?
- What are “qualified wages”?
- How to calculate the Employee Retention Credit
- Who is eligible to receive the Employee Retention Credit?
- What if you received the PPP loan? Are you eligible for the credit then?
- How do you claim the Employee Retention Credit?
Several relief programs and tax credits have opened up for small businesses amidst the financial hardships that have come with the coronavirus pandemic. Shutdowns and slow business have forced employers into difficult situations, like having to choose between continuing to pay their employees or downsizing.
The goal with several of these relief programs is to assist employers in keeping their employees on payroll. The Employee Retention Credit is a credit that directly rewards those employers who have maintained their staff levels.
Read on to learn more about this credit and if your business is qualified to receive it.
Important disclosure: We are not tax professionals and nothing in this article is to be construed as tax advice. If you wish to claim the Employee Retention Credit, please consult with your tax advisor to go over your options.
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What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a provision of the CARES Act. The ERC is a refundable tax credit that business owners can claim to help cover the wages that they’ve paid to retain their employees over the course of the pandemic. Basically, if you’ve been able to keep your employees on payroll through 2020 and 2021 (among the other qualifying factors), then you could receive this credit.
How much can an employer receive with the Employee Retention Credit?
At the time the CARES Act was signed into law, the ERC allowed employers to claim 50% of qualified wages that they paid to their employees during a calendar quarter between March 13, 2020 and December 31, 2020. This amount could not exceed $5,000 per employee.
However, some new amendments have been made as the pandemic continues on, and in December of 2020 the Consolidated Appropriations Act (CAA) expanded this credit and allowed the opportunity for businesses to receive a larger amount through the credit.
In 2021, employers who qualify for the ERC can claim a credit against 70% of qualified wages paid through December 31, 2021, with $10,000 being the maximum qualifying wages per employee. This means that for 2021, employers can claim up to $7,000 per employee per quarter (equaling up to $28,000 per employee for the year).
What are “qualified wages” for the Employee Retention Credit?
Qualified wages can vary depending on the number of employees you had during a specific period of time. And it’s important to understand what your qualified wages are since this is used to calculate the credit.
Essentially, qualified wages are the wages paid by an eligible employer to some or all of their employees between March 13, 2020 and December 31, 2020 (this does extend through 2021 if you are qualified for the credit in 2021).
If you had more than 100 full time employees in 2019, thean your qualified wages would be those paid to employees that were not providing services due to economic hardship for one of the following reasons:
- You had a full or partial shutdown of operations from a government entity due to COVID-19
- You had a significant decline in gross receipts
If you had fewer than 100 employees in 2019, your qualified wages would be those paid to any employee during one of the previously described economic hardships (1 and 2 above).
How to calculate the Employee Retention Credit
To determine the ERC amount you are eligible for, you must know the number of employees you had during the calendar year/quarters for which you are trying to claim the credit. If you didn’t have any employees in 2020 or 2021, then you are not eligible for the credit.
Quickbooks has an Employee Retention Credit Calculator which you can use to help determine this amount, but it will be helpful to have some information identified first.
Information that you’ll need to know:
- How many employees you had in 2020 or 2021 (whichever year you are eligible to receive the credit for)
- Whether or not your business experienced a closure due to COVID-19—because you may be eligible for that quarter
- If you didn’t experience a closure, you can determine if you had a revenue reduction for the period you are claiming your ERC when compared to 2019 (so you’ll need to know your revenue numbers for each quarter in 2019 and 2020, or for consecutive quarters in 2021)
- Qualified wages and health plan expenses paid during the period for which you are claiming the credit (group health plan coverage can be used to determine the credit amount if it is excluded from your employees’ gross income)
Who is eligible to receive the Employee Retention Credit?
Most types of employers can qualify for the credit, including hospitals, colleges, and nonprofit organizations. To qualify for the credit, employers must meet one of the following criteria for the calendar quarter in which they wish to use the credit:
- Your business was fully or partially shut down due to a government order. You may only qualify for the credit for the portion of the quarter during which your business was shut down, not for the entire quarter.
Most “essential” businesses which were allowed to operate throughout the government shutdowns would not qualify with this factor. Businesses that were able to continue operations through remote work also would not qualify.
- Even if your business didn’t qualify with the first factor, if your business faced a significant decline in gross receipts, then you may still qualify.
Under the CARES Act in 2020, the calendar quarter in 2020 for which you wish to apply the credit must have been below 50% of the gross profits for that same quarter in 2019. However, if the quarter immediately after the first quarter exceeds 80% of gross receipts when compared to its corresponding quarter in 2019, then you would no longer be eligible for the credit.
Under the Consolidated Appropriations Act in 2021, businesses applying for the credit for 2021 must have seen a decline by at least 20% when compared to the same quarter in 2019. If your business is new, then you can compare your 2021 quarters to the same quarters in 2021 to determine if you are eligible.
Note: Government employers do not qualify for the ERC. However, tribal entities may qualify as eligible employers. Learn more at IRS.gov.
What if you received a PPP loan? Are you eligible for the credit then?
When the ERC was first announced with the CARES Act in 2020, employers who received the PPP loan were not eligible for the credit. That changed with the Consolidated Appropriations Act in 2021. Now, even if you have received the PPP loan, you may qualify for the Employee Retention Credit if you meet the other eligibility requirements.
How do you claim the Employee Retention Credit?
Starting with your second quarter, eligible employers must report their qualified wages (along with qualified health insurance costs) on their quarterly tax returns in order to claim the credit—this is Form 941 for most employers. The credit is taken against your share of Social Security tax, and the excess is refundable.
You may be able to retain the amount of the credit you anticipate receiving from your employment taxes that would have been deposited as well (without penalty). Eligible employers can also request an advance of the credit with Form 7200.
For more information on the Employee Retention Credit, visit IRS.gov for a comprehensive FAQ.
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