Member FDIC

The Paycheck Protection Program (PPP) got all the attention when the CARES Act passed in March 2020, but there’s another COVID-19 response program that many business owners haven’t tapped into yet, that businesses that were ineligible in 2020 could be eligible now, thanks to retroactive changes to the program in 2021.

The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing the employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.

For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit.

Employers, including tax-exempt organizations, are eligible for the credit if they operated a trade or business during calendar year 2020 and experience either:

1. the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
2. a significant decline in gross receipts. 

A significant decline in gross receipts begins:

• on the first day of the first calendar quarter of 2020
• for which an employer’s gross receipts are less than 50% of its gross receipts
• for the same calendar quarter in 2019.

The significant decline in gross receipts ends:

• on the first day of the first calendar quarter following the calendar quarter
• in which gross receipts are more than of 80% of its gross receipts
• for the same calendar quarter in 2019.

The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations were suspended.

Qualified wages

The definition of qualified wages depends on how many employees an eligible employer has.

If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally those wages, including certain health care costs, (up to $10,000 per employee) paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those wages, including health care costs, (up to $10,000 per employee) paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services.

Claiming the credit

To claim the Employee Retention Credit, employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most businesses. As mentioned, you can retroactively claim these credits by filing an amended Form 941 also knowns as a 941x. You must file the amendment within three years of the original filing deadline to claim these credits. It’s also important to note that nonprofits are eligible to claim the ERCs.

As with any tax related programs and credits, it’s important to consult with a tax professional and CPA. They can help guide you in claiming these credits and filing amendments.

Note there is a deadline to apply for ERC, beginning in 2Q 2023.

FAQS and more information: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act#:~:text=The%20Employee%20Retention%20Credit%20under,financially%20impacted%20by%20COVID%2D19.

Submitted by Kyle Potswald, Lending Officer and VP

Member FDIC