The essence of the Employee Retention Credit is to incentivize employers to retain their employees on the payroll. The passing of the CARES Act 2020 mandated that eligible employers could claim certain tax percentages against 50% of qualified wages up to $10,000 per employee provided their business was financially affected due to COVID-19 for wages paid between March 13, 2020, and December 2020. This is including those who took the first PPP loans and had been disqualified to claim the credit before.
Currently, the Consolidated Appropriations Act, and the American Rescue Plan Act in 2021, have expanded terms on qualifying wages and the eligibility of employers allowing up to 70% of qualified wages(maximum of $10,000 per employee) to be claimed for credit.
This is good news because it extends until the end of the year and offers a grace period for employers to still run their operations despite the effects of the pandemic on the economy.
In addition, the American Rescue Plan Act dictates that small-scale businesses that started operating after February 2020 and were closed because of forced closures can claim up to $50,000 per quarter. This is as opposed to other businesses just claiming $7,000 per employee per quarter or $28,000 in 2021.
Taking a closer look,
The real question in every employer’s mind is how best to optimize the Employee Retention Credit without encountering any complexities. Expectedly, any employer would want to know about their eligibility and qualified wages.
The IRS clearly outlines the qualifications an employer has to meet to claim the ERC. These qualifications narrow down to two determinants:
- Any business or organization that has partially or fully suspended their operations due to government orders but only the part of the quarter when operations were suspended.
- An employer who has undergone a significant decline in gross receipts reported in the first and second quarter of 2021, translating to less than 80% of gross receipts earned in the same quarter in 2019.
What wages qualify when claiming the retention credit?
Qualified wages approved for claiming credits are those subject to FICA taxes, including certain health expenses. They need to have been paid during a time or calendar quarter when a business had suspended its operations. This is specifically after March 13, 2020, through to December 31, 2021.
However, paid leave wages under the Families First Coronavirus Response Act (FFCRA) are not included in qualified wages. Likewise, the specific health expenses are subject to the same rules as qualified wages when calculating tax credit which is up to 70% of the $10,000 threshold. The health expenses include the pretax contributions of both the employer and employee.
The IRS offers more in-depth guidelines on qualified wages and health plan expenses to help make an informed decision. Mainly, the IRS guides that qualified wages are determined by the number of full-time employees that an eligible employer has.
For clarity purposes, the variable of employee number needs a comparison between 2020 and 2021. It is also important to note that the number of full-time employees was reviewed from 100 to 500.
For 2020, employers who had more than 100 full-time employees in 2019 can only consider qualified wages of employees who did not work due to any closure or decline in business. Employers who had 100 or fewer full-time employees in 2019 can claim qualified wages paid to all employees including, those paid when not working due to a suspension or decline in business.
As for 2021, if an employer had more than 500 full-time employees in 2019, the credit to claim only covers wages paid to employees who were not working due to forced closure or reduction in revenue.
If an employer had employed less than 500 full-time employees in 2019, credit can be applied against wages paid to all employees during a period when the business experienced closure due to government orders or a reduction in revenue.
Keeping up with the rules and guidelines of claiming the Employee Retention Credit can quickly become complicated. The prudent thing to do would be to seek the help of an expert, and we are here to help. You can contact us to get more information about determining the wages that qualify when calculating the ERC.