The H.R.748 CARES Act provides a tax credit that is intended to help employers retain employees on their payroll. Employers may claim a payroll tax credit against “applicable employment taxes” for each calendar quarter equal to 50% of qualified wages paid to employees.
How do I know if I am an eligible employer for this credit?
Please note that if you are receiving the Payroll Protection Program (PPP) Loan 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 (and include certain employer-paid qualified health plan expenses).
What Does This Mean For Employers?
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).
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?
Wave is able to support the ERC on wages that you have paid on or after April 1, 2020 and before January 1, 2021. For wages paid between After March 12 and before April first please file form 7200 to claim an advance.
To claim this credit within Wave, you will be able to do so by going to the Payroll menu on the left-hand side:
- Click COVID-19
- 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 April 1, 2020. 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 draft version of Form 941, Employer’s Quarterly Federal Tax Return on April 29, 2020. The first quarter credit will be taken along with the second quarter credit on the second quarter return.
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.