Many businesses got hit hard operationally at the beginning of COVID-19, regardless of the business size. With over 4,000 businesses closing throughout the beginning months, many others decided to cut their staffing by half.
To help offset the staffing cuts made by many businesses, the federal government became involved in establishing financial legislation known as the CARES Act. Under the Coronavirus Aid, Relief, and Economic Security, an established Employee Retention Tax Credit encouraged businesses to retain their staff throughout the pandemic.
A tax credit that is both non-refundable and refundable allowed companies to apply the credit to wages as long as the business was eligible. This tax credit also included a few costs for health insurance. The amount of staff determines the calculation of the ERC throughout 2020 and 2021. Other components included qualified paid wages to an owner and family or using a PPP loan to pay for any qualified wage.
Table of Contents
- Determining Employee Retention Credit Qualified Wages
- How Are ERC Wages Calculated?
- More ERC Qualified Wage Considerations
Determining Employee Retention Credit Qualified Wages
A qualified wage involves a wage that an employee receives while the company is under orders from the government to close temporarily. The wages are also made up of those paid due to a decline in sales. The covered wages include any hourly and salary cash wage, sick and vacation pay, and all other wages that may be seen as being taxable. Wages that are considered qualified through ERC involve any expenses for health plans and become allocable.
A $10,000 in compensation limit is set for any ERC-qualified wage that an employee received throughout 2020 or the calendar quarter of 2021. These can then be applied to the wages paid between mid-March 2020 and the end of September 2021.
The breakdown below shows what the employee retention credit provides to all qualified employers.
The ERC for 2020 provided the tax credit for payroll taxes on half of the qualified paid wages and had a limit of $10,000 for each employee's wage ending at the end of December 2020.
The ERC for 2021 was a quarterly tax credit consisting of the first 70% of a qualified wage of $10,000 for each staff throughout the 2021 quarters ending September 2021.
How Are ERC Wages Calculated?
The ERC credit is calculated by determining the number of paid wages that are qualified and including expenses for health plans. The calculation you achieve will also depend upon the number of employees during 2020/2021. The wages may also affect the credit if PPP loans paid wages or staff and family members were paid.
In 2020, qualified wages equaled 50% of the Employee Retention Credit. For 2021, it was 70% of the qualified wages.
It is important to keep in mind that the credit’s 2020 maximum for each qualified employee was $5,000 throughout the year. For 2021, the per-quarter limit for each employee was set at $7,000.
How Large and Small Company-Qualified Wages are Different
In regards to the Employee Retention Credit, a large company is defined as having at least 100 employees working full-time within a single month throughout 2019. The employers, who made qualifying wage payments, are considered to have made payments to an employee who did not offer services during the time of closure or suspension of business operations due to decreases in sales.
Plus, when CARES determines a company as being large, there may be a qualification of wages for non-services and any costs for healthcare plans that were eligible throughout a quarter.
For the small business, an advantage exists in relation to a qualifying wage that the ERC covers. A small business is determined by having less than 500 employees working full-time throughout 2019. These businesses can take the ERC for the employee wages they are paid.
The ERC covers between January 2021 and ending September 2021, regardless of the employee working. This also included the expense of health plans that qualified throughout a quarter. The small businesses in 2020 were qualified if they had less than 100 employees in a month during 2019.
More ERC Qualified Wage Considerations
While the Employee Retention Credit and Paycheck Protection Program seem similar, the PPP was a loan that could be forgiven. Under the Paycheck Protection Program, funds were provided to businesses for two months' worth of payroll and benefits. A business could also use the PPP funds to pay for utilities, mortgage, or rent.
When the Paycheck Protection Program began, a business wasn't eligible for an ERC if the PPP was obtained. But then, when the 2021 Consolidated Appropriations Act was enacted, it allowed businesses who had received the PPP to qualify and obtain the Employee Retention Credit. This allowance became retroactive for 2020. The downside is that if the PPP has already been forgiven, you don't have ERC qualified wages to be claimed.
Tax Forms Regarding the Employee Retention Tax Credit
Most of the businesses that claimed the ERC enjoyed many of the benefits it provided. However, there may have been an impact on the financial statements for 2020 and 2021. The Employee Retention Credit is a credit that gets recorded to reflect income and as debt for accounting purposes.
If an Employee Retention Credit was obtained in advance, it must be credited as a refundable advance liability and the cash debited. It is important that the statements have disclosures included that describe the chosen method of accounting, no matter which was utilized. This way, your business will remain IRS-compliant.
Although the Employee Retention Credit is no longer available, your business could still make a claim if eligible. This can be accomplished by having the 941X form filed to cover any other relevant quarters. To make a 2020 claim, the application deadline is set for April 15, 2024, and 2021 claims have an April 15, 2025 deadline. After submitting the 941X form, its receipt needs to be verified prior to being able to track the ERC.
Putting It All Together
Despite there being many benefits of the Employee Retention Tax Credit for businesses, the difference lies in how the business claims it and if it was properly claimed. A business must understand qualified wages, knowing if a business is eligible, the way the IRS uses it, its effect on tax-exempt organizations, startups aimed at recovery, and if taxes from Medicare are being factored into the equation.
1. Does my business meet the requirements?
According to the 2020 CARES Act, an eligible business can claim the Employee Retention Credit if the employer operates a business or organization that is tax-exempt or trades. Despite this, the government or its agencies are not eligible.
Your business becomes eligible when operations have been suspended partially or fully, and the pandemic has caused the limitation of meetings, travel, or commerce through orders set by the appropriate authorities for the business. Plus, your business will qualify when your sales or gross receipts have declined by 50% in 2020 or 20% in 2021. Plus, if your business was a recovery startup during 2021’s third or fourth quarter, then qualification may be obtained for the Employee Retention Credit.
2. Is documentation and Form 941 X required to obtain the ERC?
When filing the Form 941 X, some of the supporting documents needed include the following:
Form 941 X copies for submission during each quarter the ERC will be claimed.
- Tax returns of previous years
- Payroll information
- Identifying company information, such as the EIN
3. Can I check my 941 X status?
If you wish to check your 941 X status, call the helpline set up by the IRS, which is (800) 829-4933. Ensure that the EIN is readily available before you call. Also, have your tax forms and social security number.
4. How long do I wait to receive my refund submitted through a 941 X?
The timeframe to receive the refund will vary. This is due to a backlog of processing at the IRS. Many businesses have been known to wait at least six months for a refund. With more than 800 IRS tax schedules and forms, the wait may be long.