Employee Retention Tax Credit | What is the Employee Retention Credit?

Employee Retention Tax Credit

The employee retention credit (ERC) provides financial relief to employers who kept employees on their payroll despite seeing a substantial decrease in their gross receipts due to the COVID-19 pandemic. The ERC was established by the 2020 Coronavirus Aid, Relief, and Economic Security Act, but the credit has been significantly modified and expanded to cover wages paid through 2021.

While straightforward in concept, claiming the ERC can be a complex, multistep process. The Dallo Law Group can help you assess whether your business qualifies as an eligible employer and determine how much of the wages paid your employees qualify for the credit.

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Employee Retention Tax Credit

The employee retention credit (ERC) provides financial relief to employers who kept employees on their payroll despite seeing a substantial decrease in their gross receipts due to the COVID-19 pandemic. The ERC was established by the 2020 Coronavirus Aid, Relief, and Economic Security Act, but the credit has been significantly modified and expanded to cover wages paid through 2021.

While straightforward in concept, claiming the ERC can be a complex, multistep process. The Dallo Law Group can help you assess whether your business qualifies as an eligible employer and determine how much of the wages paid your employees qualify for the credit.

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What is The Employee Retention Credit?

The ERC is a refundable tax credit available to eligible employers who saw substantial reductions in their gross receipts during 2020 and 2021 as a result of the COVID-19 pandemic. The amount of the ERC is based on the wages paid to the employees they kept on the payroll.

Most employers can qualify for the credit, including colleges, universities, hospitals, and 501(c) organizations. Eligible employers must show that one of the following applied for the quarter for which it is seeking the credit:

  1. Operations were partially or fully suspended, or hours were reduced due to a government order. The ERC can only be claimed for the time when business was suspended.
  2. The business saw a significant decline in gross receipts. To claim the credit in 2020 the business needed to show a greater than 50% decline in gross receipts compared to the same quarter in 2019. To claim the credit for 2021, the employer only needed to show a decline of more than 20% from the same quarter in 2019.

If your business received a Paycheck Protection Program (PPP) loan it might still qualify for the ERC for wages that were not paid using the proceeds from the portion of the loan that was forgiven.

What is The Employee Retention Credit?

The ERC is a refundable tax credit available to eligible employers who saw substantial reductions in their gross receipts during 2020 and 2021 as a result of the COVID-19 pandemic. The amount of the ERC is based on the wages paid to the employees they kept on the payroll.

Most employers can qualify for the credit, including colleges, universities, hospitals, and 501(c) organizations. Eligible employers must show that one of the following applied for the quarter for which it is seeking the credit:

  1. Operations were partially or fully suspended, or hours were reduced due to a government order. The ERC can only be claimed for the time when business was suspended.
  2. The business saw a significant decline in gross receipts. To claim the credit in 2020 the business needed to show a greater than 50% decline in gross receipts compared to the same quarter in 2019. To claim the credit for 2021, the employer only needed to show a decline of more than 20% from the same quarter in 2019.

If your business received a Paycheck Protection Program (PPP) loan it might still qualify for the ERC for wages that were not paid using the proceeds from the portion of the loan that was forgiven.

Employee Retention Tax Credit Services

Since the ERC was created in 2020 and then modified and expanded in December 2020 and March 2021, nearly all of the rules for claiming it are new and applying them to a business usually requires the help of tax professionals. The tax professionals at the Dallo Law Group have been following the changes to the Internal Revenue Service’s rules and regulations for the ERC and can help businesses that have been hurt by the pandemic get the relief they deserve.

Our firm can assist your business in determining which wages are eligible for the ERC, collect the necessary documentation, and submit the correct forms to the IRS so that you receive the largest possible credit. In addition, our specialists will calculate the size of your credit by closely comparing its business activities to the IRS’s most recent guidance on the ERC.

If your company received a PPP loan, we will work to ensure that you do not claim the ERC on wages paid from the portion of the loan that was forgiven. Finally, the Dallo Law Group can provide representation and guidance for your company if the IRS should choose to audit your claim for the credit.

Employee Retention Tax Credit Services

Since the ERC was created in 2020 and then modified and expanded in December 2020 and March 2021, nearly all of the rules for claiming it are new and applying them to a business usually requires the help of tax professionals. The tax professionals at the Dallo Law Group have been following the changes to the Internal Revenue Service’s rules and regulations for the ERC and can help businesses that have been hurt by the pandemic get the relief they deserve.

Our firm can assist your business in determining which wages are eligible for the ERC, collect the necessary documentation, and submit the correct forms to the IRS so that you receive the largest possible credit. In addition, our specialists will calculate the size of your credit by closely comparing its business activities to the IRS’s most recent guidance on the ERC.

If your company received a PPP loan, we will work to ensure that you do not claim the ERC on wages paid from the portion of the loan that was forgiven. Finally, the Dallo Law Group can provide representation and guidance for your company if the IRS should choose to audit your claim for the credit.

How Do You Calculate The Employee Retention Credit?

For qualified employers, the credit can be claimed for 50% of the qualified wages paid from March 13, 2020, to Dec. 31, 2020, up to $10,000 per employee for the year. For wages paid from Jan. 1, 2021, through June 30, 2021, employers can claim a credit against 70% of qualified wages, up to $7,000 per employee, per quarter. The American Rescue Plan Act of 2021 was enacted March 11, 2020, and allows employers to claim the ERC through the end of 2021, but the IRS has yet to provide guidance on that extension.

For 2020, employers who had fewer than 100 full-time equivalent (FTE) employees in 2019 could claim the ERC for wages paid employees during a shutdown period. Employers that had up to 500 FTE employees in 2019 can claim the ERC for wages paid during 2021, including periods where they were working. Employers with more than 500 FTE employees in 2019 may still claim the ERC, but only for wages paid when the employee was not working for the employer.

How Do You Calculate The Employee Retention Credit?

For qualified employers, the credit can be claimed for 50% of the qualified wages paid from March 13, 2020, to Dec. 31, 2020, up to $10,000 per employee for the year. For wages paid from Jan. 1, 2021, through June 30, 2021, employers can claim a credit against 70% of qualified wages, up to $7,000 per employee, per quarter. The American Rescue Plan Act of 2021 was enacted March 11, 2020, and allows employers to claim the ERC through the end of 2021, but the IRS has yet to provide guidance on that extension.

For 2020, employers who had fewer than 100 full-time equivalent (FTE) employees in 2019 could claim the ERC for wages paid employees during a shutdown period. Employers that had up to 500 FTE employees in 2019 can claim the ERC for wages paid during 2021, including periods where they were working. Employers with more than 500 FTE employees in 2019 may still claim the ERC, but only for wages paid when the employee was not working for the employer.

How to Claim The Employee Retention Credit

Employers who believe they are eligible for the ERC can claim it on their federal employment tax returns, usually on their Form 941, Employer’s Quarterly Federal Tax Return. If a business does not claim the credit, but later determines it is eligible, it can file an amended Form 941 claiming the credit. Some businesses may also claim the credit on their Form 944, Employer’s Annual Federal Tax Return, or other employer’s return.

When the employment taxes paid by a business are not enough to cover the full amount of the ERC, the business can submit a Form 7200, Advance Payment of Employer Credits Due to COVID-19, and ask for an advance on the credit. However, businesses that were formed after December 31, 2020, can’t file a Form 7200 for an advance payment of the credit.

How to Claim the Employee Retention Credit

Employers who believe they are eligible for the ERC can claim it on their federal employment tax returns, usually on their Form 941, Employer’s Quarterly Federal Tax Return. If a business does not claim the credit, but later determines it is eligible, it can file an amended Form 941 claiming the credit. Some businesses may also claim the credit on their Form 944, Employer’s Annual Federal Tax Return, or other employer’s return.

When the employment taxes paid by a business are not enough to cover the full amount of the ERC, the business can submit a Form 7200, Advance Payment of Employer Credits Due to COVID-19, and ask for an advance on the credit. However, businesses that were formed after December 31, 2020, can’t file a Form 7200 for an advance payment of the credit.

Frequently Asked Questions About The Employee Retention Credit

Employers who are eligible for the credit include those that:

  • Fully or partially suspended business operations due to a COVID-19 government shutdown order, but are only eligible for the times when the order was in force
  • Saw a significant reduction in their gross receipts when compared to the same quarter in 2019

To calculate the ERC, qualifying wages are the compensation paid to an employee during the time period for which the credit is claimed. This includes any health plan expenses the employee received during that period.

If you are a self-employed individual you can’t claim the ERC for any of your self-employment earnings.

A tax credit is referred to as refundable when the taxpayer qualifies for a credit that is larger than the tax owed and the government refunds the difference. In other words, if you pay $600 in taxes, but received a $1,000 refundable credit, you would receive a $400 refund in addition to the credit eliminating your entire tax obligation.

There is no specific form you need to file to claim the credit. Most employers will claim the ERC on their Form 941, Employer’s Quarterly Federal Tax Return, but some will use the Form 933, Employer’s Annual Federal Tax Return. If your business’s ERC is larger than its federal employment tax obligation, it can file a Form 7200, Advance Payment of Employer Credits Due to COVID-19, and ask for an advance on the credit.

To calculate the number of employees your business had for 2019, for each month you need to identify the number of employees who worked at least 30 hours a week, or 130 hours for the month. You then take the number of employees for each month for the year, add them together, and divide the result by 12. The resulting number is the number of 2019 full-time employees for the purposes of claiming the ERC.

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