[US] Employee Retention Credit (ERC)

The H.R.748 CARES Act provided a tax credit for 2020 that is intended to help employers retain employees on their payroll. Employers may claim a payroll tax credit against “applicable employment taxes” equal to 50% of qualified wages paid to employees. For 2021, H.R. 133 Taxpayer Certainty and Disaster Tax Relief Act of 2020 increases this credit to 70% of qualified wages paid to employees for each of the first two quarters of the year, and the American Rescue Plan Act of 2021 has extended this to the end of 2021.

On March 10, 2021, the American Rescue Plan of 2021 was passed. This bill extends the ERC until the end of 2021. 

Changes to the ERC provisions have been passed with Bill HR 133. You will not be automatically opted-in for the updated ERC if you had opted-in prior to January 1, 2021.
Key changes are:

  • Extension of the ERC program to the end of June 2021
  • An increase from 50% to 70% of wages
  • The 70% of wages is applied per calendar quarter (as opposed to the entire year)
  • Employers who receive Paycheck Protection Program (PPP) loans may still qualify for the ERC with respect to wages that are not paid for with forgiven PPP proceeds.

 

How do I know if I am an eligible employer for this credit?

What are qualified wages?

What Does This Mean For Employers? 

Calculation Example

How can I use and receive the ERC within Wave?

How is the ERC bookkept within Wave?

How do I turn off the ERC in Wave? 

How do I report the ERC?

Form 7200

How do I know if I am an eligible employer for this credit?

The eligibility criteria outlined below is referring to the Employee Retention Credit as it is revised in Bill HR 133, Taxpayer Certainty and Disaster Tax Relief Act of 2020, signed December 27, 2020. This went into affect January 1, 2021 and has been extended to end as of December 31, 2021 due to the signing of the American Rescue Plan Act in March 2021.. 

While the IRS has yet to update their webpages on the ERC, the changes outlined in the bill are as follows: 

  • Expanded eligibility for the credit by reducing the required year-over-year gross receipts decline from 50 percent to 20 percent and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility;
  • Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees;
  • Removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers;
  • Clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance
  • Provides that employers who receive Paycheck Protection Program (PPP) loans may still qualify for the ERC with respect to wages that are not paid for with forgiven PPP proceeds.

Employee Retention Credit 2020 eligibility (ended Dec 31, 2020)

Please note that if you are receiving the Payroll Protection Program (PPP) Loan in 2020 you cannot claim the Employee Retention Credit.

The Internal Revenue Service (IRS) has a basic FAQ section for ERC here

The credit is available to all employers regardless of size, including tax-exempt organizations but excluding governmental employers and self-employed individuals are not eligible for this credit for their self-employment services or earnings. Also to be eligible, you must have had:

  • operations fully or partially suspended due to government orders limiting business activities; or
  • suffered a loss of 50% in gross receipts compared to the same period in the previous year due to COVID-19.

The ERC is available to be claimed on qualified wages that you have paid after March 12, 2020, and before January 1, 2021.

Employers are allowed to claim the Employer Social Security Deferral Credit at the same time as the Employee Retention Credit.

What are qualified wages?

Employers with more than 100 full-time employees (as defined under the Affordable Care Act) can claim the credit on wages paid to employees who are retained but not working due to COVID-19. Employers with fewer than 100 employees can claim the credit for wages paid to all employees. Qualified wages for the credit per employee are capped at $10,000 per quarter for 2021 (and include certain employer-paid qualified health plan expenses). 

What Does This Mean For Employers? 

The Employee Retention Credit as it is revised in Bill HR 133, Taxpayer Certainty and Disaster Tax Relief Act of 2020, signed December 27, 2020 outlines updates for the calculation of the ERC. This went into affect January 1, 2021 and has been extended to end as of December 31, 2021 due to the signing of the American Rescue Plan Act in March 2021. 

Businesses are permitted to a tax credit of 70% of qualifying wages up to $10,000 in wages per employee per calendar quarter. This means the max credit per employee is $7,000 per quarter, or $14,000 per employee for 2021.

Employee Retention Credit 2020 (ended Dec 31, 2020)

Businesses are permitted a tax credit of 50% of qualifying wages up to $10,000 in wages per employee, the credit will be used to offset applicable employment taxes as defined by section 3111(a). The max tax credit amount per employee is $5,000 (50% x $10,000 of wages). 

Calculation Example

The Employee Retention Credit as it is revised in Bill HR 133, Taxpayer Certainty and Disaster Tax Relief Act of 2020, signed December 27, 2020 outlines updates for the calculation of the ERC. This went into affect January 1, 2021 and has been extended to end as of December 31, 2021 due to the signing of the American Rescue Plan Act in March 2021.

An employer with one employee making $12,000 within a quarter would be permitted to use 70% of $10,000 so the max quarterly employee limit of $7,000 against applicable employment taxes. If there is not enough taxes to offset against, a refund would be calculated at the time of filing form 941, or a refund can be requested earlier by filing form 7200.

1 Employee x $12,000 in quarterly wages = $12,000
$12,000 - $10,000 (max qualifying wage amount) = $10,000
$10,000 x 70% (eligible credit percentage for Q1)  = $7,000 employee retention credit (ERC)
$7,000 in ERC - $ (employment taxes) = Refund amount if credit exceeds employment taxes for the quarter.

Employee Retention Credit 2020 (ended Dec 31, 2020)

An employer with one employee making $12,000 within a quarter would be permitted to use 50% of $10,000 so the max annual employee limit of $5,000 against applicable employment taxes, if there was not enough taxes to offset against, a refund would be calculated at the time of filing form 941, or a refund can be requested earlier by filing form 7200.

1 Employee x $12,000 in quarterly wages = $12,000
$12,000 - $10,000 (max qualifying wage amount) = $10,000
$10,000 x 50% (eligible credit percentage)  = $5,000 employee retention credit (ERC)
$5,000 in ERC - $ (employment taxes) = Refund amount if credit exceeds employment taxes for the quarter.

How can I use and receive the ERC within Wave?

The Employee Retention Credit is available and compliant as it is revised in Bill HR 133, Taxpayer Certainty and Disaster Tax Relief Act of 2020, signed December 27, 2020. This went into affect January 1, 2021 and has been extended to end as of December 31, 2021 due to the signing of the American Rescue Plan Act in March 2021.
You will not be automatically opted-in for the updated ERC if you had opted-in prior to January 1, 2021.

To claim this credit within Wave, you will be able to do so by going to the Payroll menu on the left-hand side: 

  1. Click COVID-19 
  2. Click Claim Employee Retention Credit 

Once you have opted in to claiming the ERC, you will see the credit applied to your next approved payroll that has a pay date on or after January 1, 2021. This will appear as a line item in your Payroll Summary

Additionally, once opted in, you will also be able to view the amount of credit you have claimed as well as any remaining unclaimed amount on the same COVID-19 page. You will also see the option to stop claiming the credit if you become ineligible. This button will have you contact our Support Team to allow them to switch this feature off. 

You will see the credit amounts reflected in your Payroll Wage & Tax Report found under Reports on the left-hand menu - or you can access this report directly from the right-hand side of the COVID-19 page. 

How is the ERC bookkept within Wave?

If you are using Wave's ERC feature, a journal transaction will be created with the line item for the Employee Retention Credit as an Uncategorized Income credit. 
For more information, check out our article on bookkeeping tax credits here: 

How do I turn off the ERC in Wave? 

Please contact our Support Team as soon as possible to have your account updated. 

How do I report the ERC?

The IRS issued a new version of Form 941, Employer’s Quarterly Federal Tax Return in July of 2020. The qualified wages for the ERC as well the credit applied will be reported.

Form 7200

Employers can file Form 7200 for advance credits anticipated for a quarter at any time before the end of the month following the quarter in which the employer paid the qualified wages.

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