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The Employee Retention Tax Credit: Frequently Asked Questions

The Employee Retention Tax Credit was established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act back in March of 2020 and has been extended following the December 2020 legislation, the Consolidated Appropriations Act. It is a tax credit reported on federal payroll tax returns (Form 941) that applies to wages paid after March 12, 2020 through December 31, 2021

It depends on the year you are taking the ERC. For 2020, 50% of qualified wages up to $10,000 qualified wages per employee for all quarters ($5,000/EE for all of 2020). For 2021, 70% of qualified wages are up to $10,000 qualified wages per employee for any quarter ($7,000/EE for each 2021 quarter).

When the Employee Retention Tax Credit was first introduced in March with the CARES Act, no, you could not have utilized the ERC if you had also received a PPP loan. However, the new legislation from the CAA released in December of 2020, now allows employers to take the ERC if they received a PPP loan. Our experts will maximize both your PPP loan forgiveness and employee retention tax credit.

It depends on the size of your business. For small employers, with 100 or fewer full-time equivalents (FTEs) in 2020 and 500 or fewer FTEs in 2021, the business can claim the Employee Retention Tax Credit for all employees. For large employers, the Employee Retention Tax Credit can only be claimed for wages paid to employees not working.

If you do not file payroll tax returns on federal form 941 or 943 you cannot claim the credit.  Not-for-profit entities, 501(c)(3), are eligible provided you meet all of the other criteria.

Even if your business had no reduction in revenue for 2020, you could still qualify for the Employee Retention Tax Credit if you were subject to a government shutdown or restrictions on your business, but the timing of the credit is more restrictive.

If you have a 50% reduction in 2020 (20% in 2021) in gross receipts or greater, you would be eligible under this test.  The profitability of the company is not a factor.

No, the Employee Retention Tax Credit is a use or lose.  In 2020, if you did not use the full amount of the $5,000 per employee credit, you cannot carry that into 2021.  It resets in 2021.  Then in 2021, it increases to $7,000. Again, that is per quarter and does not carry forward per quarter.

No, not if your business operation was still significantly impacted. However, if you were functioning perfectly fine working remotely, then no, you would not qualify.

You must be careful that the same wages are not used for both the PPP forgiveness and the Employee Retention Tax Credit. It is important to coordinate both programs to maximize your relief.

The eligibility requirements for the Employee Retention Tax Credit are for a trade or business that experienced a full or partial shutdown of their operation because of governmental orders or a significant decline in gross receipts.

You could receive immediate access to the credit by reducing your employment tax deposits.

There are 2 different ways to qualify.  If you qualify due to the government shutdown, then the gross receipts do not matter.   However, if you only qualify for the Employee Retention Tax Credit with the government shutdown/limitation, then you are only eligible during the shutdown period.   If you received any PPP money, you cannot use the PPP money to fund the payroll and still get the credit.  However, wages paid not using the PPP funds would qualify.

Gross receipts are most likely based on a tax return basis if you have a book.

If you meet one of the two different criteria points for eligibility.

  1. Significant decline in gross receipts (which you mention you do not have) or;
  2. A full or partial shutdown of business due to government orders. You would want to double-check check your shutdown meets the criteria.

No. Wages paid to related individuals are not taken into account for purposes of the Employee Retention Credit. A related individual is any employee who has any of the following relationships with the employer who is an individual or a 50%+ owner:

  • A child or a descendant of a child;
  • A brother, sister, stepbrother, or stepsister;
  • The father or mother, or an ancestor of either;
  • A stepfather or stepmother;
  • A niece or nephew;
  • An aunt or uncle;
  • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

Your payroll expense on your 2020 income tax return would be decreased due to the Employee Retention Tax Credit of $250,000 that you would receive from your 2020 amended 941 returns.   For example, if your payroll tax expense account was 1,000,000 before the credit, it would be $750,000 after the credit.

There is an IRS FAQ that answers this question, see #68 in the link below.  https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-amount-of-allocable-qualified-health-plan-expenses-faqs

From the IRS, “An Eligible Employer who sponsors a self-insured group health plan may use any reasonable method to determine and allocate the health plan expenses, including (1) the COBRA applicable premium for the employee typically available from the administrator, or (2) any reasonable actuarial method to determine the estimated annual expenses of the plan.

If the Eligible Employer uses a reasonable actuarial method to determine the estimated annual expenses of the plan, then rules similar to the rules for insured plans are used to determine the amount of health plan expenses allocated to an employee. That is, the estimated annual expense is divided by the number of employees covered by the plan, and that amount is divided by the average number of work days during the year by the employees (treating days of paid leave as work days and any day on which an employee performs any work as work days). The resulting amount is the amount allocated to each day of qualified wages. Adjustments should be made for employee after-tax contributions.”

You may pick any covered period between 8 and 24 weeks in order to maximize your Paycheck Protection Program and the Employee Retention Tax Credit for 2020.

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