Frequently asked questions about Employee Retention Credits
A comprehensive guide that answers frequently asked questions about the ERC program, including eligibility, requirements, and limitations.
Thought Leadership by KBKG
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The CARES Act created the Employee Retention Credit (ERC) program to provide financial support to businesses impacted by the COVID-19 pandemic. This program is designed to help companies keep their employees on payroll during tough economic times. The program has been extended and expanded multiple times since its inception. Ultimately, it is now more accessible to a broader range of businesses. This comprehensive guide aims to provide authoritative answers to frequently asked questions about the ERC program. It covers the eligibility criteria, requirements, and limitations that businesses must meet to participate in this program. By reading this guide, businesses will gain a better understanding of the ERC program and be able to navigate it more effectively.
What is the Employee Retention Credit (ERC)?
The ERC is a refundable tax credit designed to provide financial assistance to businesses affected by the COVID-19 pandemic. Eligible businesses can receive a credit of up to 70% of wages paid and certain healthcare benefit costs to employees, up to a maximum of $26,000 per employee.
Who is eligible for the Employee Retention Credit?
Businesses of qualifying sizes, including tax-exempt organizations, are eligible for the ERC, provided they meet certain requirements. Businesses can qualify if they were fully or partially suspended by a government order or if they experienced a significant decline in quarterly gross revenue as measured against 2019 (50% decline for 2020; 20% decline for 2021). Of course, additional rules and limitations apply. KBKG is here to look at the whole picture of your business and help you determine if you are eligible for the ERC (or ERTC).
How do I claim the Employee Retention Credit?
To claim the ERC, businesses can report wages and related healthcare expenses on an amended federal employment tax return (Form 941-X) for each applicable quarter.
What are qualified wages for the ERC?
Qualified wages are the wages and compensation paid to employees during the ERC enrollment period. For 2020, there is a maximum credit of $5,000 per eligible employee.
The 2020 credit is 50% of qualified wages paid and certain healthcare benefit costs, up to $10,000 per employee. This applies for the entire year.
Eligible Employers with less than 100 average full-time employees in 2019 can take advantage of the credit. It is available for all employees receiving wages in 2020.
For 2021, there is a maximum credit of $7,000 per eligible employee, per quarter. The 2021 credit is 70% of qualified wages paid, up to $10,000 per eligible employee, per quarter (including certain healthcare benefit costs). This is the rate used to compute the credit.
Eligible Employers with less than 500 average full-time employees in 2019 can take advantage of a credit. This credit is available for all employees receiving wages in 2021.
KBKG is providing the following services to assist with ERC:
- Determine if the employer qualifies, and if so, for which quarters,
- Determine which employee wages qualify
- Calculate credits, including analysis of PPP interplay, and
- Reconcile actual credits with advance credits requested
- Prepare reconciled data for Form 941-X
- Prepare documentation supporting a business’ qualifications
Can I claim the ERC and the Paycheck Protection Program (PPP) loan?
Yes, businesses can claim both the ERC and the PPP loan, provided they meet the requirements for both programs. However, the same wages cannot be used for both programs and this means that wages paid with PPP funds cannot be used to calculate tthe ERC.
Is there a deadline to claim the ERC?
- Yes! The deadline to claim the ERC for tax year 2020 is April 15, 2024.
- The deadline to claim for tax year 2021 is April 15, 2025.
- Each quarter is claimed via a separate filing of Form 941-X.
What are the limitations on the ERC?
The ERC has several limitations, including a cap on the credit amount and a limit on the number of employees. The maximum credit per employee is determined separately for 2020 and 2021, with a maximum per employee of $26,000. Businesses over the employee limitation are only eligible for ERC on furlough costs (wages paid while employees were not providing services).
The Employee Retention Credit is a valuable program designed to provide financial assistance to businesses affected by the COVID-19 pandemic. Eligible businesses can receive up to 70% of qualified wages paid to employees, subject to certain limitations. We hope this guide has been a good resource to find frequently asked questions about the Employee Retention Tax credits.
Remember, it’s critical to consult a tax professional to determine your business’ tax eligibility and maximize your benefits under the program.
KBKG is your trusted partner for tax services and we can guide you on how to file the ERC tax credit. At any time, please reach out for a no risk assessment of your company’s potential on claiming the ERC.
Is the Employee Retention Credit taxable income?
One question we have heard asked repeatedly is whether the ERC is considered taxable income. The answer is nuanced. While the refund itself is not taxable, there is a tax effect because the amount of the credit needs to be deducted from wages in order to calculate taxable income. This essentially means you are adding back the amount of the credit in the year earned which is effectively making it taxable income.
If you’re eligible for the ERC, taking advantage of this opportunity is crucial to help your business weather the storm. However, it’s also important to know that the rules and regulations around tax credits can be complex and subject to change. It’s a good idea to consult with a qualified tax professional to ensure that you take full advantage of the benefits available.
The Employee Retention Credit is a valuable tool for small business owners looking to retain their employees during the pandemic. And, no, it is not taxable income, meaning you can use the credit to help your business without worrying about additional tax liabilities. We hope this guide has helped you!