All You Need to Know About Employee Retention Credit [2022]

If you have not recovered from the horrendous agony of COVID-19, you’re not alone. We have lost so many loved ones with the advent of the novel Coronavirus. You’ll be shocked to know that the virus took away nearly 6.3 Million people who died of COVID around the globe.

We all became confined to the 4 walls of our homes. Each facet of life came to a halt, due to the government imposed strict lockdown to prevent the spread of the novel Coronavirus. Many business owners faced tremendous struggles at the time to keep the business afloat. Expenses were higher in ratio to lesser revenue.

If you’re a business owner, the post-covid circumstance is all the more favorable for you, in terms of tax payments! The Employee Retention Credit (ERC) is just for you! Want to know all about this tax credit? Then stay tuned throughout the write-up!

What is Employee Retention Credit (ERC)?

During the pandemic, all the organizations were compelled to suspend their operations due to government-imposed strict lockdown. Yet, many business owners continued to pay taxes. As compensation, the employee retention credit (ERC) is a fully refundable tax credit available to businesses that were adversely impacted by the COVID-19 pandemic and economic shutdown. This tax credit has been designed to encourage employers to keep employees on their payroll. The businesses can claim the credit on qualified wages. Now you might wonder, “What are qualifying wages?” You will find the answer in the next point.

What are Qualifying Wages?

Qualified wages include the Eligible Employer’s qualified health plan expenses that are properly allocable to the wages. Qualified wages depend on the average number of full-time employees employed during 2020 and 2021. The maximum amount of wages for qualifying is $10, 000. The tax credit is up to 70% of all qualified wages you have paid to your employees from Jan 1, 2021, up to Sept 30, 2021, or Until Dec 31, 2021, for Newly Started businesses. For 2020, the ERC is 50% of all qualified wages paid between Mar 12, 2020, and Dec. 31, 2020.

Who is Eligible for Qualifying Wages?

Due to government-imposed restrictions, all business owners were compelled to suspend their business during the COVID-19 pandemic. During this business suspension in lockdown, if you paid your employees on the W-2 Form you are qualified for the Employee Retention Credit (ERC.) Wondering what W-2 form is? It is a document that reports the annual wages and the amount of taxes withheld by an employee. An employer sends this document to each employee and IRS (Internal Revenue Service) at the end of each year. As you paid a salary as compensation to your employees during the lockdown, this makes you eligible to claim the Employee Retention Credit.

Besides, if your business incurred a significant decline in gross receipts, then you are eligible for ERC. The decline in the gross receipt is defined as a reduction of 50% in quarterly receipts measured year over year.

How to Claim Employee Retention Credit (ERC)

Now comes the big question. How to claim Employee Retention ERC? Well, first thing first! Calculate your qualified expenses based on the number of employees and calendar year. Sort out the qualifying expenses and claim for each quarter on your quarterly employment tax returns. Carefully fill up form 941X to claim the employee retention credit (ERC). If you want to claim an advance payment of credits, you will be required to fill up Form 7200.

Calculation of Employee Retention Credit (ERC)

There are certain details on percentages that you should keep in mind to calculate your ERC.

For 2021, the Employee Tax Retention (ERC) is 70% of all qualified wages you have paid to your employees from Jan 1, 2021, up to Sept 30, 2021, or until Dec 31, 2021, for Newly Started businesses. For 2020, the ERC is 50% of all qualified wages paid between Mar 12, 2020, and Dec. 31, 2020.

This is a complex tax credit so it must be done accurately so you can maximize the credit. Combined all quarters the maximum credit is $26,000 per employee.

There is no immediate deadline but you have 3 years before the time you paid the wages to claim this refund, so if you’re eligible do not delay!

Important Notes to Keep in Mind:

Government employers and self-employed individuals are not eligible for the ERC. A self-employed individual, however, may claim the credit for eligible wages paid to their employees. Moreover, Business owners that own 50% or more of the business, as well as their family members, are NOT eligible.

According to CARES Act- 2020, business owners, who had more than 100 employees not providing services because of suspension or decline in business, can use ERC. Employers can use this credit on employees who were not working. In this case, any wages paid for vacation, sick, or other off days cannot be included as qualified wages.

That’s all about the insights on Employment Credits. Hopefully, we’ve covered all the major points. Get in touch with Ahad&Co for any support in claiming ERC.