Employee Retention Tax Credit helps keep workers on the job
The coronavirus pandemic is taking a major toll on American businesses. With nationwide closures and dwindling sales, many businesses have seen immediate effects on their bottom line. Some are forced to change their workforce, or worse, close their doors.
Thankfully, in late March of 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to help those financially struggling due to the coronavirus. The bill has four important pillars for small business owners:
- Paycheck Protection Program
- Employee Retention Tax Credit
- Payroll Tax Postponement
- Economic Injury Disaster Loans
Each program was enacted to stimulate the American economy and help small business owners in economic need.
This post will cover details surrounding the Employee Retention Credit, or ERC. Read up to hear details about what it is, why it’s important, and other key guidance surrounding the credit now!
What is the Employee Retention Credit Program?
The Employee Retention Credit program works like a payroll tax credit. As the name implies, it’s a refundable tax credit that helps small businesses keep employees on their payroll. With this credit, small business owners can claim a payroll tax credit for 50% of qualified wages up to $10,000 per employee, including certain health benefits, paid to an eligible employee.
What is the purpose of the ERC?
The ERC can help you keep your employees on the payroll if you’ve stopped doing business or significantly been affected financially.
Who is eligible for the Employee Retention Credit?
The Employer Retention Credit is need-based, meaning your business will qualify if it took a hit financially due to the coronavirus. To be more specific, your business qualifies for this credit if:
- Operations were partially or fully stopped due to a shutdown order from a government entity; or
- Gross receipts for the quarter are less than 50% of what they were last year in the same quarter. Once gross receipts go above 80% of a comparable quarter in 2019, you are no longer able to qualify after the end of that quarter.
What does this credit cover?
The credit allows you to take a payroll tax credit of 50% of employee wages paid between the time period of March 13 to December 31, 2020.
The credit covers $10,000 of qualified wages per employee, at a maximum payroll tax credit of $5,000 per employee. The credit is determined based on the amount of employment taxes paid by an employer on qualified wages paid for the calendar quarter. The qualified wages used for the credit cannot be counted for purposes of the paid family and medical leave or the work opportunity credit.
The credit also varies based on the number of employees you have.
- If you employ 100 or fewer employees: All wages qualify, regardless of whether the business remains open or not.
- If you employ more than 100 employees: Wages for employees qualify if you continued to pay the employees, but they were not able to do their jobs due to business closure or reduction in gross receipts due to coronavirus impacts.
Employee Retention Credit guidance
Like other programs in the CARES Act, you need to follow specific instructions to claim it. To claim this credit, get educated on employee retention credit guidance. Unlike business loans, the Employee Retention Tax Credit isn’t applied for — it’s a credit on a business’ tax returns.
- Claim a credit advance on Form 7200. Business owners should do this prior to paying employees. After that, they can reconcile it on Form 941 when filing their most recent quarterly return.
- Business owners can claim the refundable credit on Form 941 to recover any payroll taxes already paid in the quarter.
Note: The tax credit is taken against an employer’s portion of required Social Security deposits. Business owners should also keep their share of Social Security tax already withheld (up to the credit amount) until it’s reconciled in their quarterly payroll tax return (Form 941).
Employee Retention Credit (ERC) vs. Paycheck Protection Program (PPP)
With many CARES Act programs to choose from, it might be difficult to choose the right one for your business. Because you can’t choose to take both the ERC and Paycheck Protection Program (PPP), you should understand the differences between these two programs.
Important Note: Businesses that received PPP loans can pay the amounts received back by May 14, 2020, in order to be treated as if they did not receive a PPP loan. This would make them eligible for the ERC. You should also know that applications for the PPP are in high demand. Learn more about the PPP.
Differences between the ERC vs. PPP:
The most fundamental difference is the ERC is a tax credit claimed on your business’ tax return, while PPP is a loan granted by the Small Business Administration (SBA). Additionally:
- ERC reimburses the employer’s portion of Social Security payroll taxes up to $5,000 per an employee, while PPP can get you forgiveness on a loan used to pay for the entire payroll.
- The application process of the ERC and PPP varies. With the PPP, you must apply with the SBA, whereas with PPP it is claimed on your tax return.
- Qualifications vary between ERC and PPP as well. If your sector wasn’t shut down by authorities or your gross receipts did not decline substantially, you may not qualify for the ERC. In that case, you would want to file for PPP.
- PPP has loan forgiveness and might be advantageous for businesses with few employees. On the flipside, the ERC is not a loan so amounts won’t have to be repaid in most cases.
Employee Retention Credit example
If you’re thinking of taking the employee retention credit and need an example of how it’s used, look no further…
Sam is a small business owner based in Kansas who has experienced significant loss in her web design business due to the coronavirus. She has one employee, Ned, who is paid $2,000 per week, and he gets group health insurance. The cost to provide Ned insurance is $200 per week. In this case, the qualified wages for the Employee Retention Credit are $28,600 for the quarter, so Sam would be eligible to receive a $5,000 payroll tax credit. Keep in mind the credit would be limited to the payroll taxes paid for Ned’s wages.
Where to go for more information
Need more information about the Employee Retention Credit? View this IRS resource on the Employee Retention Credit and see how the SBA is assisting small businesses affected by the coronavirus.
We know you may have several questions about how these constantly changing times affect you and your business. That’s why H&R Block is here for you. We have knowledgeable tax pros can answer both personal and business-related tax questions. Learn more about H&R Block small business services.