Employee Retention Credit and How It Works For the Employers
The Corona pandemic brought different hardships for individuals and organizations. Many businesses were reported temporarily closed, and most employees laid off since enterprises could not afford to pay them.
Due to such negative impacts of Corona, different organizations and governments came up with The Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This act contains several business relief provisions like the employee retention credit (ERC) to help the employers out.
This article discusses what ERC entails and how it helps employers rebound from the pandemic:
What Is Employee Retention Credit?
ERC is refundable tax credit eligible for those businesses or employers who can keep employees on their payroll claim during the pandemic.
As part of the CARES Act signed into law in March 2020, which was later updated under the Consolidated Appropriation Act (CAA), ERC is meant to support and refund employers’ eligible funds to pay employees during the economic downturn caused by COVID-19.
How Much Is Credit?
According to the initial ERC that ran from March 13, 2020, to December 31, 2020, the ERC was 50% of the qualified wages employers paid their employees.
But thanks to the updated Consolidated Appropriations Act, which increased the ERC rate per employee from 50% to 70% of the qualified wages. For 2021, the amount of ERC eligible per employee is now $10 000 per quarter, increasing from $10,000 per year as indicated by the previous ERC.
What Are Qualified Wages?
These are compensations and wages employers pay their qualified employees. They include health plans or benefits the employers incur on behalf of their employees. However, qualified wages do not have the amount paid for health insurance in salary reduction arrangements.
How Does The Credit Works?
The ERC is limited to eligible wages paid from March 12, 2020, to December 31, 2020. This allowed employers to take 50% of the salaries, capped at maximum credit of $5000 per employee.
However, the updated credits allow companies to take credit from 70% to %10000 of an employee’s qualifying wages per quarter. That’s a maximum amount of $7000 per employee.
Who Qualifies For the Credit?
Employers are only eligible for this credit if they carried business or operations during the 2020 business calendar before the outbreak. And most importantly, if they partially or fully closed or suspended their operations following the government’s directives limiting business activities, travels, and social gatherings.
Also, they’re eligible if their gross receipts declined by 20% in 2021 as compared to the same time in 2019. It’s therefore believed that the business closures and quarantines impact the decline.
According to the American Plans, the eligibility is also expanded to:
- Startup businesses or enterprises were established after February 15, 2020, and have annual gross receipts of about $ 1million.
- Any startup credit is capped at %50000 per calendar quarter.
- Any business experienced a gross revenue reduction of 90% compared to the same calendar quarter of their previous years.
How to Claim ERC
There is no ERC application option provided. However, employers can claim it together when filing their federal tax returns, including claiming credits on Form 941, 943, or 944, depending on the type of business.