Tax Advantage: Employee Retention Credit

As part of the CARES Act introduced in 2020, Congress created a new tax credit to incentivize employers to keep workers on the payroll during the pandemic. The employee retention credit is an offset to certain payroll taxes; it is not an income tax credit. The credit, which began on March 12, 2020, was originally set to expire at the end of 2020. The Consolidated Appropriations Act, 2021, extended it through the first half of 2021 and then the American Rescue Plan extended it through the end of 2021. 

The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.

For each employee, wages — including certain health plan costs up to $10,000 — can be counted to determine the amount of the 50% credit. This credit can apply to wages already paid after March 12, 2020. Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience certain impacts to their business. The ARPA extends the credit to apply to wages paid during the third and fourth quarters of this year, from July 1 through December 31, 2021. Employers can claim $7,000 for each employee in every quarter, with a maximum credit of $28,000 per employee. In the final two quarters of 2021, however, the employee retention credit is a credit against the Medicare tax instead of the Social Security tax.

Qualified wages depend on how many employees an eligible employer has: If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally those wages, including certain healthcare costs (up to $10,000 per employee), paid to employees who are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

According to IRS FAQs, a business qualifies if it can open but would still be partially shut down due to a governmental order. For example, if a restaurant dining room normally has 100 tables but, due to social distancing orders, the restaurant is only permitted to have 50 tables, the employer is still subject to a partial shutdown order and would be eligible for the ERC. If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those wages, including healthcare costs (up to $10,000 per employee), paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether its employees are providing services.

Due to the enactment of the ARPA, most employers can qualify for the employee retention credit. This includes hospitals, colleges and universities and 501(c) organizations. Physician practices qualify for the employee retention credit if they underwent either a full or partial suspension of operations during any calendar quarter in 2020 or 2021 due to a government order or a significant decline in gross receipts during any calendar quarter compared to the same quarter in 2019. For medical groups, health systems, hospitals, physician practices and other healthcare providers that qualify for the credit, there are specialty tax firms available to assist in claiming the ERC.

To claim the new Employee Retention Credit, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns — which will be Form 941 for most employers — beginning with the second quarter. The IRS notes that for the first and second calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter compared to the same calendar quarter in 2019. The credit is taken against the employer’s share of social security tax but the excess is refundable under normal procedures.   

Eric Stenson has been spent his 15-year career advancing new products and services to the market. After his previous companies received more than $2 million in PPP funds, Stenson created a software-first approach to PPP loan forgiveness and ERC tax credits, co-founding Stenson Tamaddon, where he currently serves as chief executive officer. To date, Stenson Tamaddon’s platform has assisted more than 2,100 businesses with $500 million in economic stimulus benefit.

Did You Know: Under the new Consolidated Appropriates Act of 2021 (the most recent stimulus) businesses can have both PPP and ERC. However, wages attributable to PPP loan forgiveness are encumbered and cannot be used toward ERC credits. ERC is not a loan and does not need to be repaid or “forgiven” like a PPP.