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Home | Blog | Employee Retention Credit: 6 Important Things You Need to Know

Employee Retention Credit: 6 Important Things You Need to Know

By Janselle M.

Updated on May 15, 2024

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The US Congress established the Employee Retention Credit (ERC) in 2020 to lessen the consequences of the COVID-19 pandemic.

The ERC is for businesses that struggle to maintain their headcounts. With the Employee Retention Tax Credit (ERTC), companies can use a refundable credit as a tax deduction for some expenses.

Combining the Paycheck Protection Program (PPP) with the employee retention tax credit made it even more enticing.

In light of the events that occurred in 2021, Congress has taken steps to expand our coverage. The interaction of these variables prompts several crucial queries regarding the employee retention tax credit’s explanation. Below is a brief overview we have put together to help your company better understand your alternatives.

What is Employee Retention Credit?

Congress introduced the ERC in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to encourage firms to retain their workers on the payroll throughout the COVID-19 pandemic in 2020. This credit applies to employees in the United States of America. 

The initial terms of the tax credit permitted a maximum credit of US$5,000 for salaries earned between March 13, 2020, and December 31, 2021. An update has since brought up the percentage of qualifying earnings to 70% for 2021, and raised the per-employee salary ceiling from US$10,000 annually to US$10,000 quarterly.

All companies that pay their employees fair wages are eligible to claim the credit. However, separate restrictions apply to employers with fewer than 100 and fewer than 500 employees.

WHAT IS EMPLOYEE RETENTION TAX CREDIT?

The government created the employee retention tax credit, a widespread refundable tax benefit, to encourage employers to keep paying their employees. Employers can receive a credit of 50% on the first US$10,000 in earnings they pay to each employee. A business owner whose operations are wholly or partially interrupted due to COVID-19 or whose gross receipts are greater than 50%.

6 IMPORTANT THINGS TO KNOW ABOUT EMPLOYEE RETENTION CREDIT 2022

We have listed the things you need to know regarding ERC. 

1. How Much is the ERC Per Employee?

For 2020: The maximum ERC per employee is US$5,000.

For 2021: In the first three quarters of the year, the maximum ERC is US$7,000 per employee and quarter, for a total maximum ERC of US$21,000 per employee.

Businesses can refund the tax credit of up to US$26,000 per employee

2. Employee Retention Credit Eligibility

To be a qualifying employer, you must be able to demonstrate that your business experienced one of the following:

  • Your business experienced a partial or full shutdown in 2020 or 2021 due to travel restrictions or other commerce-related constraints.
  • Gross receipt reduction

Businesses that had to cease operations entirely or partially due to COVID-19 government limitations. Additionally, companies qualify for ERC if they lose 50% of their gross receipts from the same quarter. 

A trade or business that must cut back on hours due to a government mandate, either entirely or partially. The credit is only applicable for the period of the quarter when there is an interruption in business operations.

An employer whose gross receipts have significantly decreased.

  • The IRS published in August 2021 the Revenue Procedure 2021-33, which offers a safe harbor under which an employer may exclude the amount of a PPP loan forgiveness and the amount of a Shuttered Venue Operators Grant or a Restaurant Revitalization Fund grant from the definition of gross receipts solely to determine eligibility to claim the ERTC. Employers are required to apply the safe harbor to all organizations consistently.

3. What Salaries Can Be Used to Qualify for the Employee Retention Credit?

An eligible employer can consider any wages paid to an employee between March 12, 2020, and January 1, 2021, as qualified wages. If a company reduces gross sales or shuts down, the authorities will treat all employee wages as qualifying compensation.

The employee retention credit reimburses employers for certain personnel costs, including salaries and health insurance, that they have already paid. All firms can use the employee retention tax credit regardless of size or sector.

4. How Do You Claim the Employee Retention Credit?

You can claim the employee retention credit by lowering your business’ employment tax payments before filing your quarterly employment tax returns. Using IRS Form 7200, certain employers can ask for the credit to be paid in advance.

The excess will be returned to the business owner if the employee retention tax credit exceeds the employer’s overall tax liability.

Ensuring that all eligible expenses are included on PPP loan forgiveness forms is crucial to maximizing the acceptable wages available for employee retention credit. 

5. What are the Advantages of Taking the Employee Retention Credit?

The employee retention credit’s primary benefit for small businesses is not paying a significant payroll tax. This will provide them with more cash, which they can use to keep their company afloat. Now that more individuals are vaccinated, some businesses are using the tax credit to meet an increase in demand.

Another advantage is that a Payment Protection Program (PPP) loan can now be used in addition to the ERC. Business owners can now enjoy combining their PPP loan and tax credit. However, the employee salary used to get a PPP loan forgiveness cannot be used to determine the employee retention credit amount.

6. Can I Claim Employee Retention Credit and PPP Together?

Absolutely! Initially, you could not get the employee retention tax credit without taking a PPP loan. The Consolidated Appropriations Act (CAA), passed in December 2020, declared that allowing small businesses to take advantage of both opportunities as long as they complied with the regulations and met the eligibility conditions. When filling out the PPP forgiveness application, businesses must strictly avoid identifying a payroll expense as both an employee retention tax credit wage and a payroll cost. It is imperative to follow this non-negotiable requirement to avoid potential penalties or legal issues down the line.

THE ROLE OF BPO IN EMPLOYEE RETENTION CREDIT & WHY SHOULD YOU OUTSOURCE EMPLOYEE RETENTION TAX CREDIT?

The financial statements must include information about the accounting method, significant terms, and the amounts reflected.

Here is why employee retention tax credit should be outsourced. Here are just a few of the many benefits of outsourcing ERTC:

employee retention tax credit

Source: Magellan Solutions

1. Expertise 

ERTC may be challenging to understand. Internal challenges may arise for your teams as they try to complete this process, especially as standards and laws evolve.

This duty can be outsourced to professionals entrusted with staying current with the regulations.

The help of outsourced ERTC service providers can prevent mistakes made by unqualified staff using cutting-edge technology for accurate and timely completion.

2. Focus on Core Tasks

Human resources are scarce in a developing business competing in a competitive labor market. By outsourcing, you can give your employees more time to work on other essential facets of the company.

You get access to a knowledge source where you can immediately handle any emerging issues or problems.

3. Ensured Compliance 

Filing for the employee retention tax credit can be slow and challenging due to varying state requirements. This is especially true for larger firms with activities in many different states and cities.

Audits and hefty fines could be the outcome of even a single error. Indeed, as more countries fail to comply, the penalties and fines can become increasingly severe.

By avoiding punitive measures, outsourcing employee retention tax credits to a skilled outsourcing company can help ensure compliance and save money.

4. Cost Reduction

Errors in calculations and filing could have detrimental effects. In both cases, firms need to undo these actions, leading to additional time and expenses to rectify their errors.

Outsourcing the employee retention tax credit is crucial to guarantee fair pay and accurate documentation. These experts can help businesses avoid excessive fines, freeing up resources for other vital tasks.

5. Be Informed with the Changes

You might be unable to keep up with the rules and regulations as they change depending on your financial circumstances. Where outsourcing, ERTC can be helpful in this situation.

Experts possess a wide range of knowledge and are aware of the frequent changes. You can be confident that there won’t be any mistakes when claiming ERTC.

Wrapping it Up

The small business employee retention credit was established to help businesses pay their employees during the COVID-19 pandemic. The end of 2021 marked the end of the credit.

Employers still have time to submit a credit claim for March 2020 until September 2021. For March 2020 through December 2021, startup firms in recovery can still file.

Outsourcing employee retention tax credit is a wise business decision. This action provides organizations access to skilled talents who use advanced technology to avoid hefty fines.

You can start outsourcing your ERTC to BPO companies that provide accurate solutions and results. 

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      Author

      Employee Retention Credit: 6 Important Things You Need to Know

      Janselle M.

      As a content writer at Magellan Solutions Outsourcing Inc, Janselle creates captivating stories that connect with SMEs. With a passion for storytelling and a sharp eye for detail, she focuses on crafting engaging content to boost their digital marketing. She is driven by excellence, aiming to deliver messages that make their brand stand out.

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