Is the employee retention credit for employees or employers?
As the business world navigates the ongoing impact of COVID-19, many small to medium-sized businesses are struggling with financial challenges and uncertainties. One key resource introduced by the government is the Employee Retention Credit (ERC), a refundable tax incentive designed to support employers in maintaining their workforce during these trying times.
However, some confusion exists about whether this credit benefits employees or employers. Employers can still claim the employee retention credit retroactively in 2023, 2024, and 2025.
Key ERC Credit Takeaways You Will Learn:
- ERC Aimed at Employers: Designed to encourage employers to retain employees during economic challenges.
- Eligibility Criteria: Understand the qualifications needed for employers and employees to benefit from ERC.
- Financial Benefits: Learn about the financial relief and increased cash flow for employers through reduced payroll taxes.
- Employee Advantages: Discover how ERC offers job security and potential wage benefits for employees.
- Application Process: Familiarize yourself with the filing requirements and documentation needed to claim ERC.
See Important 2024 Employee Retention Tax Credit Deadline Information at the Bottom of This Article.
Understanding the Employee Retention Credit (ERC) for Employers
The Employee Retention Credit (ERC) is a refundable tax credit that provides financial relief to Eligible Employers who keep their employees on the payroll during specific periods of economic hardship caused by the COVID-19 pandemic.
Definition And Purpose
The Employee Retention Credit (ERC) is a refundable tax credit designed to provide financial relief and incentives for eligible employers impacted by COVID-19. The primary purpose of ERC is to encourage businesses to retain their employees during periods of economic uncertainty or decreased operations due to the pandemic.
Introduced under the CARES Act in 2020, ERC provides a refundable credit amounting to 70% of qualified wages paid between March 12th, 2020, and December 31st, 2021—up to a maximum credit of $7,000 per employee per quarter.
To illustrate its impact on business owners: if you paid an employee $10,000 in qualified wages during one quarter in that time frame as an eligible employer experiencing operational challenges or declines in gross receipts due to COVID-19—you could claim up to $7,000 (i.e., 70% of $10k) as a refundable tax credit on IRS Form 941.
Eligibility Requirements For Employers
Understanding the eligibility requirements for employers is crucial to take advantage of the Employee Retention Credit (ERC) program. Here are the main criteria that small and medium-sized business owners must meet:
1. Full or partial suspension of operations: The employer’s business operations must have been fully or partially suspended due to a government order related to COVID-19 during any calendar quarter in 2020 or 2021.
2. Significant decline in gross receipts: The employer’s gross receipts for a given calendar quarter must be less than 50% of the gross receipts for the same calendar quarter in 2019 (for ERC in 2020) or less than 80% of the same calendar quarter in 2019 (for ERC in 2021).
3. Be an eligible employer: Most businesses, including tax-exempt organizations, can qualify for ERC, with some exceptions, such as government entities and self-employed individuals.
4. Pay qualified wages: To claim the credit, employers must pay qualifying wages to their employees between March 12th, 2020, and December 31st, 2021.
5. Do not receive PPP loan forgiveness: Employers who received a Paycheck Protection Program (PPP) loan cannot claim ERC for wages paid with proceeds from that forgiven loan.
6. Meet employee count requirements: For employers with more than one hundred full-time employees in 2019, only wages paid to employees not providing services are eligible for credit; if there were fewer full-time employees in the same period, all employee wages might qualify.
7. Comply with IRS filing requirements: Employers must file Form 941 and follow other required tax procedures while claiming ERC.
By meeting these eligibility criteria, small and medium-sized business owners can maximize their potential financial benefits from the Employee Retention Credit program.
Eligibility Requirements For Employees
To maximize the benefits of the Employee Retention Credit for your business, it’s essential to understand the eligibility requirements for employees. Here’s a breakdown of which employers qualify under these criteria:
1. Full-Time or Part-Time Status: Both full-time and part-time employees can be included in calculating the credit. However, the ERC does not use full-time equivalent (FTE) determination.
2. Excluded Employees: Owners of a corporation or self-employed individuals cannot claim credit for their wages. Additionally, family members of business owners may not be eligible for employer credits.
3. Rehired Employees: Employees previously laid off or furloughed and rehired also qualify for the credit.
4. Employees with Reduced Hours: If an employee’s work hours have been reduced due to economic conditions or government mandates, you may still include their wages when calculating your ERC.
5. Paycheck Protection Program (PPP) Recipients: Employers receiving PPP loans can still claim the ERC but cannot claim it on wages covered by PPP loan forgiveness.
6. Wages Paid During Leave: Qualified wages paid during sick or family leave related to COVID-19 under the Families First Coronavirus Response Act may not be included in ERC calculations.
By understanding and considering these eligibility requirements, small and medium-sized business owners can fully utilize this valuable tax credit to support their businesses and employees.
Benefits Of ERC For Employers
ERC provides financial relief and incentives to retain employees, resulting in reduced payroll taxes and increased cash flow for eligible employers.
Financial Relief And Incentives To Retain Employees
One of the main benefits of the Employee Retention Credit (ERC) for employers is the financial relief and incentives it offers to retain employees. The credit provides a significant tax break equal to 70% of qualified wages paid to employees, up to $7,000 per employee per quarter.
This reduces payroll taxes, and the internal revenue service increases cash flow for businesses struggling during these difficult times.
Additionally, by retaining employees and reducing turnover rates, businesses may be able to enhance benefits and potentially increase wages. With reduced expenses through the ERC, some employers may have more wiggle room in their budgets to invest back into their workforce.
Reduced Payroll Taxes And Increased Cash Flow
One key benefit of the Employee Retention Credit for eligible employers is reduced payroll taxes and increased cash flow. The credit can offset federal employment tax deposits for qualified wages, reducing an employer’s overall tax liability.
For example, if an eligible employer pays an employee $10,000 in qualified wages in a quarter and receives the maximum credit of $7,000 per employee, they could reduce their quarterly payroll taxes by up to $7,000.
In addition to reducing taxes owed on current payroll periods, employers can claim refundable credits for any excess amount beyond their tax liability.
Overall, the Employee Retention Credit presents a valuable opportunity for eligible employers looking to reduce costs and improve cash flow without sacrificing employee retention or cutting jobs.
Benefits Of ERC For Employees
Employees also benefit from the Employee Retention Credit by having job security and the potential for increased wages, making it a win-win for both employers and employees.
Job Security And Continued Employment
The Employee Retention Credit (ERC) can significantly benefit employers and their employees. One of the most important benefits is job security and continued employment for workers during these challenging times.
By reducing payroll costs, eligible employers can keep more workers on staff without resorting to layoffs or furloughs. This helps employees avoid the financial strain of unemployment while giving them the peace of mind that comes with a steady paycheck.
For example, an Eligible Employer who pays qualified wages of $10,000 per quarter could receive a credit of up to $7,000 per qualified employee’s wages for that same quarter under ERC. This can translate into tangible savings for many small-to-medium-sized businesses struggling due to pandemic-related disruptions in operations and cash flow.
Enhanced Benefits And Potential For Increased Wages
Eligible employers who claim the Employee Retention Credit (ERC) can benefit from enhanced employee benefits and the potential for increased wages. By retaining employees during a challenging time, eligible employers can show their commitment to their workforce and increase job and economic security.
For example, if an employer pays qualified wages of $10,000 per quarter to an eligible employee, they could receive a maximum credit of $7,000 per quarter.
Overall, by taking advantage of ERC eligibility requirements and claiming the credit on IRS Form 941, businesses can provide enhanced support for their employees while also benefiting financially.
Qualifying For The Credit
To qualify for the Employee Retention Credit, employers must meet eligibility criteria such as experiencing a significant decline in gross receipts or a full or partial suspension of operations. They must file Form 941 to claim the credit.
Meeting Eligibility Criteria
Employers must meet specific eligibility criteria to qualify for the Employee Retention Credit. Here are the requirements:
1. Business operations: Eligible Employers must have experienced a full or partial suspension of their business operations during any calendar quarter in 2020 or 2021 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19.
2. Significant decline in gross receipts: Alternatively, Eligible Employers must have experienced a significant decline in gross receipts during a calendar quarter compared to the same quarter in 2019. A significant decline is defined as a decrease in gross receipts by at least 50% compared to the same quarter’s previous year.
3. Qualified wages: An employer’s qualified wages depend on the number of employees in 2019. For employers with an average of more than 500 full-time employees in 2019, qualified wages are limited to wages paid to employees not providing services during the applicable fourth quarter only.
4. Paid leave credits: Employers can claim the ERC and Paid Leave Credits under FFCRA for wage payments made after March 31st, 2020, and before January 1st, 2021.
5. Tax-exempt status: Non-profit organizations with tax-exempt status under Section 501(c) of the Internal Revenue Code of taxes are also eligible for ERC, provided they operate an eligible business.
Meeting these eligibility criteria is necessary to claim the Employee Retention credit and offset payroll taxes or claim them as a refund on IRS Form 941.
Filing Requirements
To claim the Employee Retention Credit, Eligible Employers must file IRS Form 941 for each quarter they claim the employee retention tax credit. Here are some filing requirements that small to medium-sized business owners should know:
– The credit can be claimed on Form 941 for wages paid between March 12th, 2020, and December 31st, 2021.
– Employers can reduce their federal employment tax deposits or claim a refund on an applicable employment tax return to receive the credit.
– Employers who reduce their tax deposits should report the qualified wages and associated payroll taxes in Part 2 of Form 941.
– If the payroll tax credit amount exceeds the total employment taxes owed for any given quarter, employers can request an advance payment of the remaining credit amount by filing Form 7200.
– Employers must maintain supporting documentation to substantiate their eligibility for the credits claimed on Form 941. This includes records of eligible wages paid to employees and documentation showing a decline in gross receipts or full or partial suspension of operations.
By following these filing requirements, small to medium-sized businesses can claim the Employee Retention Credit and receive financial relief to help retain employees during these challenging times.
Required Documentation And Deadlines
To claim the Employee Retention Credit, eligible employers must provide certain documentation and meet specific deadlines. Here are the required documentation and deadlines businesses need to know:
1. Quarterly Filing: Employers must file IRS Form 941, Employer’s Quarterly Federal Tax Return, to claim the credit for wages paid during each calendar quarter.
2. Supporting Documentation: Employers must maintain supporting documentation on how they qualified for the credit. This can include records of business operations before and after suspension, financial statements showing a significant decline in gross receipts, and employee retention records.
3. Deadline for Claiming Credits: Eligible employers can claim the credit on their employment tax returns from their first quarter in 2020 until June 30th, 2022.
4. Record Retention: Employers must keep all records associated with ERC claims for at least four years after filing their employment tax returns claiming those credits.
Small to medium-sized business owners can confidently qualify for and claim the Employee Retention Credit to gain financial relief during challenging times by providing proper documentation and meeting the necessary deadlines.
Calculating ERC
To calculate ERC, employers must determine the qualifying wages and periods, the maximum credit amount, and calculation methods, following eligibility criteria and IRS guidelines.
Qualifying Wages And Periods
To qualify for the Employee Retention Credit, employers must pay qualified wages to employees during specific periods. For 2020, eligible wages are those paid between March 12th and December 31st, while for 2021, those paid between January 1st and June 30th.
It’s important to note that qualified wages may differ based on the size of your business and whether you have experienced a full or partial suspension of operations. Eligible small businesses with fewer than 500 full-time employees can claim the credit on all qualified wages regardless if their operations were suspended or not.
On the other hand, larger employers can only claim the credit on qualified wages paid during periods when their operations were fully or partially suspended due to COVID-19-related reasons.
Maximum Credit Amount And Calculation Methods
The maximum credit amount for the Employee Retention Credit is $7,000 per employee per quarter. This means eligible employers can receive up to $28,000 in credit per employee for wages paid between March 12th, 2020, and December 31st, 2021.
The credit is calculated based on qualified employee wages during specific periods. For employers with over 500 full-time employees, qualified wages are limited to employees not providing services due to a full or partial suspension of operations or a significant decline in gross receipts.
For employers with fewer than 500 full-time employees, all wages paid during eligible quarters qualify for the credit regardless of whether the employee provided services.
How To Claim ERC
To claim the ERC, eligible employers must file Form 941 and report the credit on their quarterly tax return; read on to learn more about how this process works and how your business can benefit from it.
Filing Form 941 And Refundable ERC
To claim the Employee Retention Credit, eligible employers must file IRS Form 941, the Employer’s Quarterly Federal Tax Return. Here are some things to keep in mind when filing:
1. Include all qualified wages paid to employees during the quarter for which you are claiming the credit.
2. Report any advance payments of the credit received on Form 941.
3. If you have reduced your employment tax deposits in anticipation of claiming the credit, report those amounts on Form 941 as well.
4. Attach any required documentation to your return, such as proof of a significant decline in gross receipts or a partial or full suspension of operations.
5. If you anticipate claiming a refund for any overpayment of payroll taxes, check the box on line 24 to indicate that you are requesting a credit or refund and provide your bank account information for direct deposit.
By filing Form 941 correctly and including all necessary information, eligible employers can immediately claim the full amount of their refundable Employee Retention Credit.
Impact On Tax Returns And Compliance Requirements
Claiming the Employee Retention Credit on tax returns can provide significant relief for eligible businesses. Employers can offset their payroll taxes with the credit or claim a refundable tax credit if there are excess credits.
To claim ERC, employers must file Form 941, the applicable employment tax return.
Compliance is key when claiming this credit, as incorrect filing or incomplete documentation may result in penalties or legal action.
ERC In 2020 Vs
In 2020, the Employee Retention Credit was available only for wages paid between March 12th and December 31st; however, in 2021, employers can claim the credit for wages paid between January 1st and December 31st.
Changes In Qualifying Wages And Eligibility Criteria
The Employee Retention Credit underwent several changes in 2021, including qualifying wages and eligibility criteria updates. Here are the latest changes that small to medium-sized business owners should be aware of:
1. Increased Qualifying Wages: In 2021, eligible employers can claim a credit for up to 70% of qualified wages paid to employees, compared to 50% in 2020.
2. Expanded Eligibility Criteria: Eligible employers must have experienced a significant decline in gross receipts in any quarter of 2020 or 2021 (compared to the same quarter in 2019) and/or have been fully or partially suspended due to government orders related to COVID-19. Previously, businesses had to experience a full or partial suspension of operations or meet specific revenue loss thresholds.
3. Wage Thresholds: For businesses with up to 500 employees, all wages paid during suspension or decline in gross receipts qualify for the credit (up from previously capped at $10,000 per employee per year). For businesses with over 500 employees, only wages paid during periods of suspension qualify for the credit.
4. Maximum Credit Amount: The maximum credit amount increased from $5,000 per employee per year in 2020 to $7,000 per quarter in 2021.
These changes aim to encourage more small and medium-sized businesses struggling from the pandemic’s effects to take advantage of the Employee Retention Credit and retain their employees while reducing payroll taxes.
Maximum Credit Amount And Effective Periods
The maximum credit amount for the Employee Retention Credit is $7,000 per employee per quarter. This means that employers can receive up to $28,000 in employee retention credit for each eligible employee from March 12th, 2020, to June 30th, 2022.
The effective periods for claiming credit have changed over time. For wages paid between March 12th and December 31st, 2020, the credit was equal to 50% of qualifying wages. For wages paid between January 1st and June 30th, 2021, the credit increased to 70% of qualifying wages.
For wages paid between July 1st and December 31st, 2021, eligible employers can claim a maximum credit of up to $7,000 per employee per quarter. This is an increase from the previous limit of $5,000 per quarter.
It’s important to note that the maximum credit amount cannot exceed the employer’s share of Medicare tax on qualified wages or any applicable payroll taxes. Additionally, self-employed individuals are not eligible for this credit.
Understanding these maximum credit amounts and effective periods can help eligible small and medium-sized business owners take advantage of the Employee Retention Credit and receive financial relief during these challenging times.
Limits And Restrictions On ERC
There are some limits and restrictions on the Employee Retention Credit, including eligible wages and potential drawbacks that employers should be aware of.
Eligible Wages And Restrictions
1. Eligible wages include compensation paid to employees between March 12th, 2020, and December 31st, 2021. To qualify for the Employee Retention Credit, employers must pay qualified wages to eligible employees. Here are some important facts about eligible qualifying wages paid and restrictions:
2. Qualified wages vary depending on the size of the employer.
3. For employers with more than 500 full-time employees, qualified wages are only those paid to employees who aren’t providing services due to the COVID-19-related circumstances.
4. For employers with 500 or fewer full-time employees, all employee wages qualify for the credit regardless of whether the employee provides services.
5. The maximum amount of qualified wages taken into account for any employee is $10,000 per calendar quarter.
6. Wages required by law (such as overtime) and certain other types of compensation (like severance payments) are not considered eligible wages.
7. Employers cannot claim the Employee Retention Credit and take a deduction for those same wages under another provision of the CARES Act or Families First Coronavirus Response Act (FFCRA).
By following these guidelines on eligible wages and restrictions, small to medium-sized businesses can determine if they qualify for the credit and how much they can claim to offset payroll taxes or receive a refund.
Potential Drawbacks And Repayment Requirements
While the Employee Retention Credit (ERC) provides financial relief and incentives for eligible employers to retain employees, several potential drawbacks exist.
For instance, if an employer claims the credit for a particular employee’s wages, they cannot claim that same employee’s wages for other tax credits, such as the Work Opportunity Tax Credit or Empowerment Zone Employment Credit.
Furthermore, while claiming the ERC may provide immediate cash flow benefits by offsetting payroll taxes or providing refunds, it can also impact future taxes and compliance requirements.
Employers must properly document their eligibility and qualified wages paid to employees and ensure they meet all filing requirements and deadlines. Failure to do so could result in additional fees or legal consequences.
Conclusion and Summary Answering Is the Employee Retention Credit For Employees or Employers?
In conclusion, the Employee Retention Credit (ERC) is primarily designed for employers to receive financial incentives and relief to retain their employees during the COVID-19 pandemic. However, it also benefits employees in terms of job security and potentially enhanced benefits.
Impact On Employees And Job Security
The Employee Retention Credit (ERC) benefits employers not only financially but also positively impacts employees and their job security. By providing incentives to retain workers, businesses can avoid layoffs and maintain their workforce during economic uncertainty.
In addition, the ERC may also result in enhanced employee benefits or the potential for increased wages as companies strive to retain valuable employees. Employers who qualify for the credit are more likely to invest in their business operations and provide additional resources to support their staff.
Benefits And Implications For Employers.
The Employee Retention Credit (ERC) provides significant financial incentives for eligible employers to retain employees during the COVID-19 pandemic. Businesses that have experienced a decline in gross receipts or have been fully or partially suspended are eligible for this credit.
The ERC allows businesses to claim up to $7,000 per employee per quarter on IRS Form 941 and can be used to offset payroll taxes, reducing the financial burden on these small to medium-sized business owners.
This credit provides vital relief and encourages employers to continue investing in their workers by retaining them and potentially increasing wages and benefits.
Good news. There is still time to file! The employee retention tax credit can still be claimed retroactively and there is still time to file, even in 2023, 2024, and 2025 for the past tax years.
Employee Retention Tax Credit (ERC / ERTC) Help: Claim Up To a $26,000 Refund Per Employee for Your Business
Disaster Loan Advisors™ can assist your business with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) program, without you having to pay an excessive percentage of your hard earned ERC refund.
DLA doesn’t charge a percent like many companies do. Our flat fee structure is fair and reasonable based on the amount of work involved. Keep More of Your Refund™
Depending on eligibility, business owners can receive up to $26,000 to $33,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.
The ERC / ERTC Program is a valuable IRS tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.
Schedule Your Free Employee Retention Credit Consultation to see what amount $ of employee retention tax credit your company qualifies for.
ERC Deadline Urgency in 2024
April 15, 2024 Deadline for the 2020 ERC Tax Year
The deadline is coming up for the final opportunity to retroactively claim your business Employee Retention Credit for the past 2020 tax year. With the April 15, 2024 deadline fast approaching, we urge you; don’t let this final chance pass!
While not all businesses will qualify, as it depends on multiple factors per IRS Rules and Guidelines, you might be leaving significant financial relief on the table from prior COVID impact to your business during the past 2020 and 2021 business operation years.
Last year, in September 2023, the IRS temporarily paused processing ERC Claims for the remainder of last year. We at Disaster Loan Advisors (DLA) predicted this over one year ago when we made this ERC video warning business owners. See the ten-minute mark of the video for details.
TAKE ACTION NOW IN 2024
Even though the IRS has temporarily paused processing, you will still want to check eligibility and file now (if you qualify) because once the IRS will resume processing, ERC tax credit claims are processed in the order they are received.
If you haven’t previously filed for the ERC Credit, it is worth scheduling a phone call to at least explore your possible eligibility from both the past 2020 and 2021 business tax years. Contact us today for a deep-dive analysis to determine if your business qualifies one or more quarters from the 2020 and / or 2021 tax years.
As a leading dedicated member of the Tax and Accounting Team at Disaster Loan Advisors™, Mark focuses on unlocking the ERC Tax Credit's potential for eligible firms that qualify, providing strategic advice, and detailed guidance to ensure substantial financial recovery and growth. His methodical approach to client engagement includes comprehensive deep-dive analysis, customized consultation and guidance, and a commitment to achieving tangible results for each business served.
Disaster Loan Advisors™ (DLA) offers a comprehensive suite of services designed to navigate the complexities of the Employee Retention Tax Credit (ERC) program, ensuring that qualified businesses leverage the maximum possible benefit with minimum hassle. Unlike some firms that charge exorbitant contingency or percentage-based fees (often between 10% to 30% of your ERC refund), DLA operates on a fair and reasonable, transparent flat-fee structure that aligns with the IRS's guidelines.
If you are looking for an ERC Company that believes in providing professional ERC Services and value for small business owners, in exchange for a fair, reasonable, and ethical fee for the amount of work required, Disaster Loan Advisors™ is a good fit for you. STAY SAFE. STAY COMPLIANT. KEEP MORE OF YOUR REFUND.™
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