Employee retention credit (ERC) can broadly be defined as a refundable tax credit that businesses can claim on qualified wages paid to their employees. This refund is designed to encourage employers to keep paying workers, by making wages more affordable.
It’s no secret the pandemic has make things complicated for employers and workers alike. Employee retention credits can help ease the burden. In this blog, we will uncover the details you might be wondering about when it comes to employee retention credit. So, let’s dive right in!
First, let’s take a look at employee retention credit acts, to get a better understanding of general guidelines.
2020 CARES Act – For qualifying employers, credit can be claimed against 50% of qualified wages paid. Up to $10,000 per employee yearly for wages paid between March 13th and December 31st, 2020.
2021 Consolidated Appropriations Act – For qualifying employers, credit can be claimed against 70% of qualified paid wages. For the first two quarters of 2021, the number of wages that qualify as credit includes $10,000 per employee per quarter.
2021 American Rescue Plan Act – From this act, credit from 70% of qualified wages of up to $10,000 per quarter per employee can be obtained for all of 2021. Simply put, this equals a maximum of $7,000 per employee per quarter or up to $28,000 for all of 2021.
In addition to employee retention credit, the Families First Coronavirus Response Act helps employers afford paid sick and family leave for those affected by the coronavirus. This includes both a refundable paid sick leave credit and a family leave under the FFCRA.
This reimburses employers for the cost. FFCRA paid leave benefits have no longer been mandatory since January 1 of 2021. However, employers that continue to provide paid leave can claim tax credit under the FFCRA until September 30th, 2021.
Most employers, including colleges, universities, and hospitals, can qualify for employee retention credit. There are two factors that determine eligibility. One of the factors must apply in the calendar quarter for employers that wish to use the credit.
Based on IRS guidance, most businesses generally don’t meet the first factor, as the following would not qualify:
These businesses may be able to qualify with the second factor of experiencing a significant decline in gross receipts.
When calculating employee retention credit, wages and compensation, in general, that are subjected to FICA taxes along with certain health expenses are taken into consideration. These payments must have been made within a specific time frame. From March 12, 2020, and December 31, 2021.
The IRS has many methods of calculating the amount that qualifies under health expenses. Generally, this includes the employer and employee pre-tax portion and excludes any after-tax amounts.
In order to claim employee retention credit, employers must report their total qualified wages and related health insurance costs for each quarter when filling out Form 941, their quarterly employment tax returns.
Employers are able to retain a portion of employment taxes. This includes federal income tax withholding, social security, and Medicare taxes. Both the employees’ share and employer’s share of Social Security and Medicare taxes are considered up to the amount of credit without penalty. This takes into account any reduction for deposits in anticipation of paid sick leave and family leave credit.
We hope this guide helps to answer some of your questions about employee retention credit. Remember, every situation is different. So, we advise speaking to a tax professional when making financial decisions!
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