The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act was an economic stimulus package passed in March 2020 in the United States in response to the economic fallout of the pandemic. The Employee Retention Tax Credit was formulated under the CARES Act to encourage businesses to keep employees on their payroll. It is a refundable tax credit against certain employment taxes. This amount was 50% of up to a maximum amount $10,000 in qualified wages (including health plan expenses) that an eligible employer who had been financially impacted by COVID-19 paid to employees after March 12, 2020, and before January 1, 2021. The maximum credit that an eligible employer could claim was $5,000 per employee.
The CARES act and therefore the ERC was then extended and amended in The Consolidated Appropriations Act, 2021 through to June 30, 2021. The corrections and expansions include:
The credit rate of qualifying wages was increased from 50% to 70%
The per employee creditable wage was increased from $10,000 for the year to $10,000 for each quarter.
The year-over-year gross receipts have been reduced from 50% to 20%
Employers can use a safe harbour by providing prior-quarter gross receipts to determine eligibility.
Employers who did not have their businesses in existence in 2019 can claim the credit.
The maximum credit that an employer can claim for a full-time employee per quarter is $7,000.
To qualify for Employee Retention Tax Credit, you must be an employer of a business or organization that was running during the calendar year 2020. You should have suspended your operations fully or partially during any calendar quarter in 2020. This could have been due to orders from appropriate government authorities limiting commerce, travel or group meetings due to COVID-19. These restrictions could have included meetings for commercial, social, religious or other purposes. Your operations could also have been suspended due to your business experiencing a significant decline in gross receipts during the calendar quarter. It is important to note that most government employers are not eligible for Employee Retention Tax Credit although tribal governments and tribal entities may be eligible. Although self-employed individuals cannot claim credit for their own earnings, they may be able to claim it for wages paid to their employees.
The Employee Retention Credit can be fully refunded to the eligible employer if the amount of credit is more than the federal employment tax that is owed. If for any calendar quarter the amount of credit you are entitled to exceed the amount of tax you have to pay on all wages paid to all employees or on all compensation for employers subject to RRTA, then the excess is treated as an overpayment and will be refunded to you under sections 6402(a) and 6413(a) of the Internal Revenue Code. The excess will also offset any remaining tax liabilities on the employment tax returns and will be reflected as an overpayment on the return.
Previously the answer to this would have been no, as employers that received a PPP loan would not have been able to take advantage of the Employee Retention Tax Credit, regardless of whether the loan was forgiven. However new legislation from the Consolidated Appropriations Act, 2021 allows businesses to take Employee Retention Credit even if they have received PPP funding and got their loan forgiven, as long as the payroll identified for the Employee Retention Credit was not paid out of PPP funds. The change is retroactive to March 13, 2020.
The employee retention credits are worth 70% of the qualifying wages you pay added to the associated qualified health plan expenses you pay to your employees.
For example, if you have one employee and you pay $10,000 in qualified wages in the first quarter of 2021, you can get credit of $7,000 ($10,000 x 70%).
If their wage is below $10,000 add wages and health plan expenses and calculate 70% of that amount.
The Employee Retention Tax Credit is subject to income tax. If credit is claimed after an income tax return has been filed, then it has to be amended.
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