Everything You Need to Know About Employee Retention Credit for Small Businesses!

COVID-19 not only took a heavy toll on businesses from the readily recognized standpoint of lost sales and services revenues that were not or could not be generated but also on the proverbial back end, as businesses still had to deal with the mounting challenges of having to meet their financial commitments and responsibilities to keep their employees employed over this seemingly endless period of time. Most importantly, employers had to ensure that their employees got paid either while furloughed or working greatly reduced hours.

Too much of a burden for any business with which to deal, the advent and implementation of the Internal Revenue Service’s Employee Retention Credit (ERC) has been mutually beneficial to financially distressed employers and employees alike, not to mention, past and prospective clients. In short, the ERC simply ensured that your business got paid back for keeping your employees on the payroll.

According to the IRS (IRS.gov), the Employees Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages (detailed below) that qualified employers (detailed below) paid to its employees after March 12, 2020, and before January 1, 2021. Employers who were eligible for the ERC can receive prompt access to the credit by simply reducing the employment tax deposits that they would otherwise be required to make.

Additionally, if the employer’s tax deposits were insufficient or not able to cover the credit, the employer may then request and get an advance payment directly from the IRS (using Form 7200, Advance Payment of Employer Credits Due to COVID-19). If eligible, individual employee wages (up to $10,000, including certain health plan costs) can be counted to establish the actual amount of the 50% credit and can then be applied to the wages that were already paid during the above-mentioned time frame.

Employers, including tax-exempt organizations, are eligible for the credit (which applies to qualified wages and certain health plan expenses that were paid during this specific period or any calendar quarter in which operations were suspended) only if they were to have operated during the 2020 calendar year and experienced or met the following parameters:

1. Due to COVID-19, a business or trade operation was fully closed or at least partially suspended during any calendar quarter because of a government order that limited commerce, travel or group meetings.

2. Due to COVID-19, a business or trade operation encountered a significant decline in gross receipts.

• The significant decline in gross receipts began on the first day of the first calendar quarter of 2020, in which an employer’s gross receipts were less than those for the same calendar quarter in 2019.

• The significant decline in gross receipts ended on the first day of the first calendar quarter following the calendar quarter in which an employer’s gross receipts were more than 80% of its gross receipts for the same calendar quarter in 2019.

 

Qualified wages are contingent upon the number of employees an eligible employer has and is defined as:

1. If an employer averaged more than 100 full-time employees during 2019:

• Qualified wages generally also include certain health care costs (up to $10,000 per employee) that were paid to employees who were unable to provide their service because business operations were suspended, or due to the decline in a business’s gross receipts.

• Employers can only count qualified wages as the actual amount that the employee would have been paid during an equivalent period during the 30 days that immediately preceded the employer’s economic hardship.

2. If an employer averaged 100 or fewer full-time employees during 2019:

• Qualified wages generally also include certain health care costs (up to $10,000 per employee) that were paid to employees during the period in which business operations were suspended, regardless of whether or not its employees were providing their service.

 

Other guidelines by which an eligible employer is able to request and apply for the Employee Retention Credit (ERC) is conditionally dependent upon the following credit and relief provisions:

• An employer is not eligible for the ERC if the employer were to have received a Small Business Interruption Loan under the Paycheck Protection Program (PPP), authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

• Under the Families First Coronavirus Act, wages previously counted for this credit cannot include those for which the employer received a tax credit for paid sick and family leave.

• Under section 45S of the Internal Revenue Code, wages previously counted for this credit cannot include those for paid family and medical leave.

• Under section 51 of the Internal Revenue Code for the employee, if an employer were allowed a Work Opportunity Tax Credit, the credit cannot include employees.

 

In order to claim the new Employee Retention Credit (ERC), beginning with the second quarter, employers who are eligible must report all of their total qualified wages along with their related health insurance costs for each successive quarter (using Form 941 for most employers) on their quarterly employment tax returns. The credit can then be taken against the employer’s portion of Social Security Tax, with the excess amount refundable utilizing customary means.

In likely expectation of claiming the anticipated credit, employers can withhold the equivalent amount of employment taxes that alternatively would have been deposited, including federal income tax withholding, the employees’ portion of Social Security and Medicare taxes, as well as the employer’s portion of Social Security and Medicare taxes for all employees (up to the amount of the credit without any penalty, taking into account any reduction for deposits made in expectation of the paid sick and family leave credit that is provided in the Families First Coronavirus Response Act.

Tsamutalis & Company LLC will work with you throughout the year to ensure compliance with tax laws and regulations while also maximizing your profits. Contact us to learn more about what it’s like to work with our team for your New Jersey small business accounting and tax needs.