EMPLOYEE RETENTION CREDIT
Here are some frequently asked questions about the ERC.
EMPLOYEE RETENTION CREDIT OVERVIEW
The Employee Retention Credit was part of the CARES Act legislation, it is a fully refundable tax credit for employers who paid employees and meet specific qualifying events to become eligible. The Consolidated Appropriations Act (CAA) in December of 2020 expanded this credit.
WHAT IS THIS CREDIT?
With the CAA expanding the Employee Retention Tax Credit to allow employers who also received a PPP Loan to be able to claim this credit, it also allowed this credit to be taken on wages paid in 2020 and 2021. For the full year of 2020 the credit is 50% of qualified wages up to $10,000 per employee, but for 2021, that credit increases to 70% and is based on $10,000 of wages per employee PER QUARTER. Meaning that in 2020, the maximum credit you could receive is $5,000, but in 2021, that figure increases to $14,000 for the first two quarters of 2021.
HOW DO I CLAIM THE EMPLOYEE RETENTION CREDIT?
There is no application or specific form to fill out. Employers, can claim this credit on Form 941 among other employment tax forms depending on your filing requirement. If these have already been filed, it will likely involve amending these returns.
WHAT IS THE BENEFIT OF PURSUING THIS CREDIT?
While it is not as advantageous as a PPP Loan, if your business experienced a significant decline in gross receipts or was subject to a partial or full shutdown of operations and you continued to pay your employees with non-PPP funds, this is an opportunity where you could receive a refund for the qualified wages. There is no requirement on what the credit is used on once you receive it, so you could use it to aid in re-hiring your employees as conditions are appropriate, help cover operating costs or pay down debt that may have accumulated for a variety of reasons.
WHAT IMPACT WILL THIS HAVE IF I RECEIVE A CREDIT?
Depending on the year the wages are paid in, it will offset or reduce your deduction for wages that is on your tax return. Where the PPP Loan has been determined to not be taxable for Federal purposes, this credit will likely result in an increase in tax, but it is only subject to ordinary income taxes. For example, without the Employee Retention Credit if you were showing a loss of $20,000, based on your situation, you qualified for a credit of $7,500. Now your loss has been reduced by that $7,500 and is $12,500 instead, but you may receive $7,500 refund or reduced payroll taxes.