employee-retention-credit

When the pandemic wreaked havoc all over the world, the consequent economic downturn swelled the unemployment rate in America by more than 14 million. The number rose at an unprecedented rate, beating the two-year Great Recession record. This steep increase in the unemployment rate left the government and the business in the US in limbo. It urged the State to cut short the impact by announcing ERC or Employee Retention Credit under the CARES Act, 2020.

What is Employee Retention Credit? (ERC)

Employee retention credit (ERC) is a relief provision that allows businesses to claim qualified wages, including some health insurances spent on employee retention. There was further extension of this legislation in 2020 under the Consolidation Appropriation Act (CAA). Hence, from January 1, 2021, onwards, all employers who took Paycheck Protection Program (PPP) loans could be eligible for a credit for 2020 and 2021. This refundable tax credit encourages companies to keep their employees on the payroll so that the State can reduce the number of people who might demand unemployment benefits.

What are qualified wages?

Qualified wages are the wages that employers pay or incur for services performed by the employees during the time period. The wage amount is directly proportionate to the number of employees an eligible employer has. This also comprises your health plan expenses associated with concurrent wages. Further, it can be determined by the number of full-time equivalents (FTE) employees you had in 2019.

As an employer, if you have more than 100 full-time employees during 2019, then the qualified wages are those wages given to employees who are not providing services because of the adverse measures implemented during COVID-19. A maximum claim of $10,000 per employee should be available if you paid an equivalent duration during the 30days prior to the economic breakdown.

If the average number of employees is less than 100 or if you have fewer full-time employees during the course of 2019, then the qualifying wage amount is the wage that is paid to employees during lockdown regardless of whether or not your employees are providing services.

Now, let us analyze a comprehensive guide on the ERC criteria for 2020 and 2021.

For 2020

The ERC is initiated against certain employment taxes that are equal to 50% of the qualified wages. However, there are eligibility requirements. Once those are met, the eligible employer can evoke the ERC on the wages they pay to employees after March 12, 2020, and prior to January 1, 2021.

The benefit is that eligible employers can directly access the credit and thereby reduce the tax burden during these harsh times. This can be done by trimming down the employment tax deposits that they are otherwise compelled to pay. The new ERC also allows employers to get an advance payment from the IRS if the employment tax deposits prove insufficient to cover the credit.

Eligibility Requirement

Employee Retention credit 2020 is applicable in the following situations
  • ERC is available for the wages paid when business operations are fully or partially suspended due to the uncertainties caused by COVID19 restrictions. Businesses can also claim the credit if the gross receipt for any quarter in 2020 is less than 50% of the same Quarter of 2019. This Gross receipt criterion is applicable only for the first day of the first calendar quarter of 2020. On the other hand, it ends on the first day of the first calendar quarter following the next quarter, where the gross receipts cross more than 80% of the calendar quarter in 2019.
  • If the full-time employees for 2020 are less than 100.
  • ERC can be claimed when the credit is 50% of the qualified wages, i.e., $ 5000 / per employee / per year. For each employee, the qualified wages, including health costs, is $10,000. Since these wages were already paid to employees on March 12, 2020, employers can take advantage of the situation to reduce upcoming deposits or request an advance credit on Form 7200, Advance of Employer Credits Due To COVID-19.
For 2021

There were significant changes in guidelines in the revised version of Employers Retention Credit. On August 4, 2021, the Treasury Department and the IRS issued the new provisions and the qualified wages after June 30, 2021, and January 1, 2022. The employer eligibility requirements have got extended to small businesses that are under-recovery. The financial aids are planned holistically to include employers that got the worst hit by the Coronavirus pandemic. The new changes are the following;

  • The Act increased the small employer threshold from 100 average full-time employees to 500 employees. As per the new alterations, employers with up to 500 FTE employees in 2019 can claim the credit for 2021 on wages paid for working and non-working periods.
  • The definition of eligible employers is now stretched to include employers that experienced a suspension of activity due to governmental orders and consequently experienced a 20% decline in their Gross receipt.
  • If the average employee count is less than 500 and they are working during the pandemic, then your business is eligible for the credit. You can also claim it in advance anytime during the quarter based on your 70% average payroll in the same quarter in 2019. In 2021, employers can claim up to $7,000 instead of $ 5,000 per employee.
  • Employers with more than 500 employees can claim credit for the wages paid during the same time regardless of their working measures.
  • The America Rescue Plan is now extended to small businesses that were established on February 15, 2020, with annual gross receipts of $ 1 million. If your start-up has experienced a decline of 90% or more in comparison with the same quarter in the previous year, then you are eligible to claim the credit.
  • The businesses that are either partially or fully suspended either during the government restrictions or during any quarter of 2021 and the gross receipts are less than 80% when compared to 2019 can also claim the credit under 2021 provisions.
  • If your business did not exist in 2019, then you can claim the credit by taking the 2020 comparison.
  • In case you work as a self-employed individual, you cannot claim self-employment wages under the ERC.

Employee Retention Credit can help prevent businesses from sinking and protect livelihoods

ERC aims to create a dual positive impact on the economic scenario of the United States. It will enable struggling entities to retain their workforce with the necessary aid from the government.

This scheme also targets to promote the job protection of millions of Americans. It will lower the employees’ retrenchment rate, which could have been the consequence of the financial crisis triggered by the pandemic restrictions. Thus, employers in the US should consider their eligibility and file claims for ERC to ensure a better future.

Claim your Employee Retention Credit with the backing of Infinity Globus

Are the ERC and its new changes confusing? We can lend a hand and save your business in no time. Infinity Globus has a substantial wealth of experience in offering hassle-free outsourced accounting services. Our professionals can conveniently determine whether you are an eligible employer and what your qualified wage is. We help you to calculate your ERC and adapt to the novel 2021 changes effortlessly. With our support, you can meet the deadlines and adhere to the changes in haste. Don’t delay; Contact us to claim your credit now!

Shared By: Nevil Soni – CPA, Audit & Assurance Manager at Infinity Globus