The Employee Retention Credit (ERC) is a refundable tax credit that was introduced by the federal government to support businesses affected by the COVID-19 pandemic. The ERC is available to eligible businesses and tax-exempt organizations that have faced significant financial hardship due to the pandemic. The credit is designed to encourage employers to retain their employees by providing a financial incentive to do so.

Calculating the ERC can be complex, as there are several factors that can impact the credit amount that a business is eligible for. The credit is calculated based on qualified wages paid to employees during a specific period, and the credit amount can vary depending on the size of the business, the number of employees, and other factors. To accurately calculate the ERC, businesses must have a thorough understanding of the eligibility requirements and the various calculations involved in determining the credit amount.

Understanding Employee Retention Credit

Employee Retention Credit (ERC) is a refundable tax credit that was introduced by the US government to help eligible businesses and tax-exempt organizations that were affected during the COVID-19 pandemic. The credit is available to employers who had employees and experienced a significant decline in gross receipts or were fully or partially suspended due to government orders.

The ERC is calculated based on the qualified wages paid to employees during the eligible period. Qualified wages are wages paid to employees during the eligible period and are subject to certain limitations. The eligible period for the ERC varies based on the time frame and the amount of gross receipts decline.

For the period of March 13, 2020, to December 31, 2020, employers can file for a credit of 50% percent of wages paid up to $10,000 per employee, with a maximum credit of $5,000 per employee for each eligible quarter. For the first three quarters of 2021, the credit goes up to 70 percent of wages paid, up to $10,000 per employee, with a maximum credit of $28,000 per employee.

It is important to note that the ERC is a credit against the employer's share of social security tax and is not included in the employee's income. Also, if an employer received a Paycheck Protection Program (PPP) loan, they are still eligible for the ERC, but the same wages cannot be used for both the PPP loan forgiveness and the ERC.

In summary, the ERC is a valuable tax credit that can help eligible businesses and tax-exempt organizations during the COVID-19 pandemic. The credit is calculated based on the qualified wages paid to employees during the eligible period and is subject to certain limitations. Employers can file for the credit on their employment tax returns and should consult with their tax advisor to ensure they are eligible and calculate the credit correctly.

Eligibility Criteria

To be eligible for the Employee Retention Credit (ERC), employers must meet certain criteria. The following subsections outline the requirements for qualified wages, eligible employers, and the impact of PPP loans.

Qualified Wages

Qualified wages are wages paid to employees that meet the eligibility criteria. For the first two quarters of 2021, qualified wages are limited to $10,000 per employee per quarter. This means that the maximum credit per employee for the first two quarters of 2021 is $14,000. For the third and fourth quarters of 2021, qualified wages are limited to $10,000 per employee per quarter. The maximum credit per employee for the last two quarters of 2021 is $7,000.

Eligible Employers

To be eligible for the ERC, employers must meet one of two criteria. First, the employer must have experienced a full or partial suspension of operations due to a government order related to COVID-19. Second, the employer must have experienced a significant decline in gross receipts. For 2021, a significant decline in gross receipts is defined as a decline of 20% or more in gross receipts compared to the same quarter in 2019.

Impact of PPP Loans

Participation in the Paycheck Protection Program (PPP) does not affect eligibility for the ERC. However, if an employer received a PPP loan, the amount of qualified wages used to calculate the ERC will be reduced. Specifically, if an employer received a PPP loan, the amount of qualified wages used to calculate the ERC cannot include wages used to justify PPP loan forgiveness. This means that the same wages cannot be used for both the PPP loan forgiveness and the ERC.

Calculating the Credit

To calculate the Employee Retention Credit (ERC), eligible employers must determine the qualified wages paid to employees during the applicable calendar quarter and apply the credit cap. The following subsections provide an overview of the steps involved in calculating the ERC.

Determining Qualified Wages

Qualified wages include wages and compensation paid to employees during the applicable calendar quarter. For 2021, the ERC is equal to 70% of qualified wages paid in a calendar quarter, up to a maximum of $10,000 per employee per quarter. For 2020, the ERC is equal to 50% of qualified wages paid in a calendar quarter, up to a maximum of $10,000 per employee per year.

Employers must determine which wages are qualified for the ERC. Qualified wages are those paid to employees who were not performing services due to a full or partial suspension of business operations or a significant decline in gross receipts. The decline in gross receipts must be at least 20% compared to the same calendar quarter in 2019.

Applying the Credit Cap

The credit cap limits the amount of the ERC that can be claimed per employee per quarter. For 2021, the maximum credit for eligible wages paid to any employee during 2021 is $28,000. For 2020, the maximum credit for eligible wages paid to any employee during 2020 is $5,000.

Employers must apply the credit cap to the qualified wages paid to each employee during the applicable calendar quarter. The credit cap is based on the maximum amount of qualified wages that can be used to calculate the ERC.

Calculating the Credit for Part-Time Employees

Employers must prorate the credit for part-time employees based on the number of hours worked. The credit is calculated based on the qualified wages paid to the employee during the applicable calendar quarter, up to the credit cap.

To calculate the credit for part-time employees, employers must determine the average number of hours worked per week and multiply that by the number of weeks in the applicable calendar quarter. The result is the number of hours worked during the applicable calendar quarter. The qualified wages paid to the employee during the applicable calendar quarter are then prorated based on the number of hours worked. The credit is calculated based on the prorated qualified wages, up to the credit cap.

In conclusion, calculating the ERC involves determining the qualified wages paid to employees during the applicable calendar quarter, applying the credit cap, and prorating the credit for part-time employees. Employers must ensure they meet the eligibility requirements and accurately calculate the credit to avoid potential penalties or interest.

Claiming the Credit

To claim the Employee Retention Credit, eligible employers must file Form 941, Employer's Quarterly Federal Tax Return, for the calendar quarter in which the qualified wages were paid.

Filing Form 941

Employers can claim the credit on Form 941 by reporting the credit on line 11c for the applicable quarter. If the credit exceeds the employer's share of social security tax for the quarter, the excess credit can be refunded by filing Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.

Adjusting Quarterly Filings

Employers who have already filed their Form 941 for a quarter but did not claim the credit can make an adjustment by filing an amended Form 941-X for the applicable quarter. Employers should reduce their deduction for wages by the amount of the credit claimed on Form 941 or Form 941-X for the same wages.

Documentation and Record-Keeping

Employers must maintain documentation to support their eligibility for the credit and the amount of the credit claimed. Documentation should include records of the qualified wages paid to employees, the number of full-time equivalent employees, and the dates of closure or reduced operations due to COVID-19.

Employers should also retain copies of any government orders or decrees that caused a full or partial suspension of their operations or a significant decline in gross receipts. These records should be kept for at least four years after the date the tax becomes due or is paid, whichever is later.

Overall, claiming the Employee Retention Credit requires careful documentation and attention to detail. Employers should consult with a tax professional or refer to the IRS guidance for additional information and assistance.

Special Considerations

Changes in Legislation

As with any tax credit, legislation can impact the availability and calculation of the Employee Retention Credit (ERC). As of June 2021, the American Rescue Plan Act of 2021 has extended the ERC through December 31, 2021. The legislation also made changes to the credit, including increasing the credit rate from 50% to 70% of qualified wages and expanding the eligibility criteria for employers. It is important to stay up-to-date on any changes in legislation that may affect the ERC.

Interaction With Other Credits and Relief Provisions

Employers should be aware of how the ERC interacts with other tax credits and relief provisions. For example, employers who received a Paycheck Protection Program (PPP) loan may be eligible for the ERC, but the same wages cannot be used for both the PPP loan payment calculator bankrate forgiveness and the ERC. Additionally, employers who claim the Work Opportunity Tax Credit (WOTC) may need to adjust their ERC calculations to avoid double-dipping.

State-Level Implications

While the ERC is a federal tax credit, employers should also be aware of any state-level implications. Some states may conform to the federal ERC provisions, while others may have their own provisions for employee retention credits. Employers should consult with their state tax authorities to determine any state-level implications for the ERC.

In conclusion, employers should stay informed of any changes in legislation, understand how the ERC interacts with other credits and relief provisions, and be aware of any state-level implications. By doing so, employers can ensure they are accurately calculating and claiming the ERC.

Amending Prior Filings

If an eligible employer has already filed its employment tax return and did not claim the Employee Retention Credit (ERC), it can still claim the credit by amending its return. The amended return must be filed on Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for the relevant calendar quarter.

The amended return must include the information necessary to support the claim for the credit. This information includes the amount of the credit claimed, the number of employees retained, and the amount of qualified wages paid during the relevant calendar quarter.

It is important to note that the deadline for filing an amended return to claim the ERC is generally three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. Therefore, if an eligible employer wants to claim the ERC for a calendar quarter in 2020, the amended return must generally be filed by April 15, 2024.

If an eligible employer has already claimed the ERC on its employment tax return but later discovers an error or omission in the calculation of the credit, it can correct the error by filing an amended return. The amended return must be filed on Form 941-X and must include the corrected information necessary to support the claim for the credit.

In order to avoid errors or omissions in the calculation of the ERC, eligible employers may want to consider seeking the assistance of a tax professional or using tax preparation software specifically designed to calculate the credit.

Compliance and Penalties

To claim the Employee Retention Credit (ERC), eligible employers must file Form 941, Employer's Quarterly Federal Tax Return, and Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, if applicable. The ERC is claimed on Form 941 for the calendar quarter in which the qualified wages were paid, and it is reported on line 11c.

Employers must maintain adequate records to support the credit claimed, including records to demonstrate the impact of COVID-19 on their business. The IRS may request additional documentation during an examination to verify that the credit was properly claimed.

If the IRS determines that an employer claimed an incorrect amount of ERC, the employer may be subject to penalties for underpayment of tax, accuracy-related penalties, or fraud penalties. In addition, the IRS may assess interest on any underpayment of tax.

Employers should take care to ensure that they are eligible for the credit and that they calculate the credit accurately. They should also maintain complete and accurate records to support the credit claimed. If employers have any questions about their eligibility for the ERC, they should consult with a tax professional or contact the IRS for guidance.

Frequently Asked Questions

What are the eligibility criteria for the Employee Retention Credit?

To be eligible for the Employee Retention Credit (ERC), an employer must have experienced either a full or partial suspension of operations due to a government order related to COVID-19 or a significant decline in gross receipts. Employers can claim the credit for wages paid to employees during the period of suspension or decline in gross receipts.

How can I determine the qualified wages for the Employee Retention Credit?

Qualified wages for the ERC depend on the size of the employer. For employers with 500 or fewer employees, qualified wages include all wages paid during the period of suspension or decline in gross receipts. For employers with more than 500 employees, qualified wages are limited to wages paid to employees who are not providing services due to the suspension or decline in gross receipts.

What is the maximum amount of credit an employer can claim per employee for the Employee Retention Credit?

The maximum amount of credit an employer can claim per employee for the ERC is 70% of qualified wages, up to a maximum of $10,000 in qualified wages per employee for all calendar quarters.

How does the Paycheck Protection Program (PPP) loan forgiveness impact the Employee Retention Credit calculation?

If an employer received a PPP loan, the amount of qualified wages that can be used to calculate the ERC is reduced by the amount of PPP loan forgiveness. However, employers can still claim the ERC for wages that exceed the amount of PPP loan forgiveness.

What are the deadlines for claiming the Employee Retention Credit in 2023?

The deadline for claiming the ERC for the 2023 tax year is the due date of the employer's income tax return for that year, including extensions.

Is there an official worksheet or calculator provided for determining the Employee Retention Credit?

Yes, the IRS provides Form 941, Employer's Quarterly Federal Tax Return, which includes a worksheet for calculating the ERC. Additionally, the IRS has provided guidance on how to calculate and claim the ERC on its website.