What is the Employee Retention Credit?

The employee retention credit is a tax credit available to eligible employers to encourage retaining employees during the COVID-19 pandemic. It was authorized by the CARES Act in March 2020 and has been extended and modified several times.

For 2020 and 2021, employers could claim a maximum credit of up to $7,000 per employee for qualified wages paid. This includes a maximum credit of up to $5,000 per employee for 2020 and a maximum of $7,000 per employee in 2021. The credit is 50% of qualified wages paid, up to the $7,000 cap.

To qualify for the credit in 2020 or 2021, an employer must have experienced either:

  1. A full or partial suspension of operations due to a COVID-19 government order
  2. A significant decline in gross receipts compared to the same quarter in 2019.

Employers, including tax-exempt organizations, can use the employee retention credit to help offset applicable employment taxes. Rules on what counts as qualified wages vary based on employer size. Consult the IRS instructions for more details on eligibility and how to calculate the credit.

Who qualifies for the employee retention credit?

The employee retention credit is available to both for-profit and tax-exempt employers that meet certain criteria related to COVID-19 impacts. The following employers generally qualify:

  • Employers whose business operations were fully or partially suspended due to COVID-19 government orders.
  • Employers who experienced a significant decline in gross receipts, defined as having gross receipts fall by more than 50% in a quarter compared to the same quarter in 2019.
  • For employers not in existence in 2019, the comparison is made to the 2020 quarters.
  • Certain aggregation rules apply to related entities.

In addition, to claim the credit for qualified wages paid to an employee, the employee must have been employed by the eligible employer for some period in 2020 or 2021. Special rules apply for 2020 regarding which wages qualify based on employer size.

Employers who received Paycheck Protection Program loans may still qualify for the employee retention credit, but wages used for PPP loan forgiveness cannot also be used for the credit.

Self-employed individuals are not eligible for the credit directly, but it can be claimed by an employer on behalf of common law employees. Government employers also do not qualify for the employee retention credit.

How do I Claim the Employee Retention Credit for 2020?

To claim the employee retention credit for 2020, employers should follow these key steps:

  • Review eligibility based on COVID-19 impacts to your operations in 2020. You must have experienced a full or partial suspension due to a government order or had a significant decline in gross receipts.
  • Calculate your eligible qualified wages paid to employees in 2020. The definition of qualified wages depends on your average number of employees in 2019.
  • For employers with more than 100 employees, qualified wages are limited to those paid to employees not providing services. For those with 100 or fewer employees, all employee wages qualify.
  • Complete IRS Form 941 for each quarter in which you had qualified wages. This is also your quarterly employment tax return.
  • On each Form 941, enter your credits for that quarter on line 11c and line 13d. The credit is taken against applicable employment taxes owed.
  • If your credit exceeds the employment taxes, the excess will be treated as an overpayment and refunded.
  • Also complete and attach IRS Form 7200 to request advance payment of the credit for a quarter before filing Form 941.
  • Retain employee retention credit documentation with your tax records.

Consult the instructions for Form 941 and Form 7200 for details on properly calculating and reporting your credit each quarter. The employee retention credit can be claimed retroactively on amended returns if you qualify.

How do I Claim the Employee Retention Credit for 2021?

To properly claim the employee retention tax credit for 2021, employers should follow these key steps:

  • Review eligibility criteria based on COVID-19 impacts in 2021, including suspension of operations or a decline in gross receipts of at least 20% compared to the same quarter in 2019.
  • Calculate your eligible qualified wages for each quarter in 2021. For 2021, the credit is 70% of qualified wages up to a per-employee limit of $10,000 per quarter.
  • Report your employee retention credit on Form 941, line 11c for each quarter you have qualifying wages.
  • If your credit exceeds your share of Social Security tax owed for a quarter, the excess will be refunded to you after filing Form 941.
  • You can also file Form 7200 to request an advance credit payment for expected eligible wages before filing your Form 941.
  • If you already filed Form 941 without claiming the credit, you can file an adjusted return to claim it retroactively.
  • Retain documentation including records of qualified wages paid per employee per quarter.
  • For qualified wages that also count for the Work Opportunity Tax Credit, assign those wages to the employee retention credit first.
  • If you received a PPP loan, wages used for forgiveness cannot count for the retention credit.

Consistently follow the instructions for Form 941 and Form 7200. Keep detailed wage payment records. Calculate your credit carefully each quarter. Consult an accountant or tax advisor if you need help claiming this valuable tax credit.

What forms do I need to claim the employee retention credit?

There are a few key forms employers will need to complete and maintain in order to properly claim the employee retention tax credit:

  • Form 941 – This is your quarterly employment tax return. On this form, you will report your total eligible employee retention credits for each quarter along with payroll tax liabilities.
  • Form 7200 – You can file this form to request an advance payment of your anticipated employee retention credits for a quarter before you file Form 941. This allows you to get early access to the credits.
  • Employee records – You must maintain records of qualified wages paid to each employee for each calendar quarter. This includes tracking employees who were retained but not working.
  • Form 5884-A – This form is used specifically to claim the credit for qualified sick and family leave wages under the Families First Coronavirus Response Act. It accounts for the interaction between those credits and the employee retention credit.
  • Form 3800 – If your employee retention credit exceeds your payroll tax liability, you must file this general business credit form with your income tax return to carry forward any unused credit.
  • Form 8849 – If you’re a tax-exempt employer, you must file this form to claim a refund of the employee retention credit, since you don’t file Form 941.

Maintaining detailed wage payment records and following instructions for these forms will ensure you properly claim the credit and have documentation to support your eligibility. Consult IRS instructions or a tax professional if you have questions. Claiming this credit now can provide a cash flow boost.

How Much is the Employee Retention Credit?

The employee retention tax credit provides eligible employers a credit equal to 50% of qualified wages paid in 2020, up to $10,000 total per employee for the year. This equals a maximum credit in 2020 of $5,000 per employee.

For 2021, the credit rate increased to 70% of qualified wages, up to a cap of $10,000 per employee per quarter. This means the maximum 2021 credit an employer could claim is $7,000 per employee per quarter or $28,000 total for the year.

Here are some key facts on the credit amount:

  • It is a dollar-for-dollar reduction in federal employment taxes the employer owes.
  • If the credit exceeds taxes owed for a quarter, the excess is refunded as an overpayment.
  • For 2020, the 50% credit is based on qualified wages, excluding health plan expenses.
  • For 2021, it’s 70% of qualified wages including health plan expenses.
  • For small employers, qualified wages are the total wages paid to all employees, regardless of the services provided.
  • For large employers, qualified wages only count for employees retained but not providing services.
  • Credit amounts are earned in the quarter the qualified wages were paid.

To maximize the credit, employers should carefully track qualified wages per employee per quarter according to the criteria that apply to their business. Correctly calculating the credit as 50% of those wages in 2020 and 70% in 2021 will determine the total credit amount available.

Is the Employee Retention Credit Refundable?

Yes, the employee retention tax credit is a refundable tax credit. This means that even if an employer does not owe any federal employment taxes for a quarter after applying for the credit, the excess amount can be refunded to them.

For example, if an employer qualified for a $20,000 employee retention credit in Q1 2021 but only owed $5,000 in federal employment taxes for that quarter, the employer could apply $5,000 of the credit to reduce those taxes to zero. The remaining $15,000 credit would then be treated as an overpayment and refunded to the employer after filing Form 941.

Key facts on the refundability of this credit:

  • Eligible employers get the full credit amounts they qualify for, regardless of taxes owed.
  • Refunds can provide a helpful cash flow boost to struggling businesses.
  • Employers must accurately calculate credit amounts and properly file Form 941.
  • An option exists to file Form 7200 to request an advance credit payment before filing the quarterly return.
  • Tax-exempt employers who don’t otherwise file Form 941 can claim refunds of the credit on Form 8849.
  • Carryback and carryforward rules apply if credits exceed taxes owed for the year.

In summary, the employee retention credit being refundable is advantageous for employers, as they can benefit from the full amounts regardless of tax liabilities. This enhances the credit’s effectiveness as an incentive to retain employees.

Does the employee retention credit reduce payroll taxes?

Yes, companies can use the employee retention tax credit to help offset their share of Social Security tax owed on employee wages for a quarter. This payroll tax offset is the primary mechanism for realizing savings from the credit.

Here is how it works:

  • The 6.2% Social Security tax on employee wages, matched by the employer, is reported and paid on Form 941 each quarter.
  • The employee retention credit is claimed on the same Form 941 by entering the amount on the appropriate line.
  • This directly reduces the company’s 6.2% Social Security tax liability for the quarter.
  • If the credit exceeds the amount of Social Security tax owed, the excess is treated as an overpayment and refunded.
  • The company still deducts 6.2% from employees’ gross pay for Social Security and matches this with a 6.2% employer portion.
  • However the credit allows retaining up to the amount paid from the company’s portion of these payroll taxes.

Some key benefits of using the credit to offset Social Security tax obligations include:

  • Immediate payroll tax savings for the quarter
  • Allows retention of funds that would otherwise be owed in taxes
  • Provides quick access to the credit amounts

Using this dollar-for-dollar offset, the employee retention credit can be a strategic tax benefit for companies facing COVID-19 impacts. Consult a tax professional to ensure proper documentation and application of the credit against Social Security tax liabilities.

Can I Claim the Employee Retention Credit Retroactively?

Yes, the IRS does permit employers to claim the employee retention tax credit retroactively if they qualify based on COVID-19 impacts in 2020 or 2021. There are a couple of options to claim the previously-missed credit:

File an amended return – Employers can file an adjusted employment tax return, such as Form 941-X, to claim the credit for prior calendar quarters in which they had eligible wages. You must still meet eligibility criteria based on operations and gross receipts.

Claim on current return – Even if you are beyond the typical statute of limitations, you can claim the credit on your Form 941 for the immediately preceding quarter. Get the remaining eligible amounts on the next return filed.

Key details about retroactive claims:

  • Interest will accrue from the due date of the original return on any overpayments.
  • There are no late-payment penalties if the credit offsets taxes previously owed.
  • Keep detailed employee wage payment records to support amended figures.
  • Work with a tax advisor to calculate prior period amounts accurately.
  • Retroactive claims must be filed before applicable time limits expire.

With proper documentation, the IRS will allow employers to claim the credit retroactively if they qualify based on COVID-19 impacts in quarters going back to 2020. File amended or current returns to get eligible amounts.

When does the employee retention credit expire?

The employee retention tax credit is currently set to expire after the fourth quarter of 2021. There have been ongoing extensions and modifications to the credit over time, but as of now, employers cannot claim it for qualified wages paid after December 31, 2021.

Key facts regarding the credit’s expiration timeline:

  • Enacted in March 2020 in the CARES Act, it was originally set to expire December 31, 2020.
  • The Consolidated Appropriations Act in late 2020 extended it for all of 2021.
  • The IRS has confirmed it cannot be claimed for Q1 2022 at this time.
  • Additional legislation would be required to extend it again past 2021.
  • Previous expansions increased the credit rate and maximum amounts in 2021 compared to 2020.
  • Employers can still amend prior period returns to claim credits if eligible.

Unless Congress passes further legislation, businesses cannot claim the employee retention tax credit for qualifying wages paid in quarters during 2022 or future years.

However, the existing credit remains substantial – up to $7,000 per employee per quarter in 2021. Companies should ensure they properly claim all eligible amounts before the credit expires at the end of 2021. Consult a tax advisor if you need assistance.

Links to related resources:

https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs
https://www.journalofaccountancy.com/news/2021/jun/employee-retention-credit-guidance-addressing-common-issues-released.html

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