What Your Company Needs to Know About the Employee Retention Credit

The CARES Act, passed in 2020 in response to the COVID-19 pandemic, offered several forms of relief to businesses that might have been negatively affected by shutdowns and other pandemic-related limitations. One of the relief programs was the Paycheck Protection Program (PPP), which offered small businesses loans to help them maintain their payroll through shutdowns. The CARES Act also introduced the Employee Retention Credit, and the American Rescue Plan, passed in early 2021, extended it.

Like the PPP, the Employee Retention Credit aims to offer businesses that might have been hard-hit by the pandemic financial assistance. Learn more about what the credit is, whether your business is eligible and how you can claim it.

What Is the Employee Retention Credit?

The Employee Retention Credit is a refundable tax credit that certain employers can claim against wages they paid to employees. A tax credit reduces the amount of tax a business owes. Refundable tax credits make it possible for a business to get money back from the government. For example, if a company owes $1,000 in taxes but has a refundable tax credit of $2,000, it will receive $1,000 from the government.

When the Employee Retention Credit was introduced in the CARES Act, companies could claim 50% of wages paid, up to $10,000 per employee, for 2020. The maximum credit amount is $5,000 per employee for the year. If a company has fewer than 500 employees, qualified wages are what were paid to an employee during the time of shut down or a drop in receipts, whether the employee was providing services or not. For companies with more than 500 employees, qualified wages are what a company paid to employees who weren’t providing services due to a shutdown or other decline in business.

The American Rescue Plan extended and expanded the Employee Retention Credit. The credit is now available through the end of 2021. Instead of claiming just $5,000 per employee, eligible companies can claim up to $7,000 (70% or wages up to $10,000) per quarter, per employee, or up to $28,000 per year per employee.

What Businesses Are Eligible for the Credit?

Initially, the credit was only available to companies that also received a PPP loan. The expansion of the credit opened it up to more businesses. Eligible companies need to have had a full or partial shutdown at some point during 2021 and yet kept employees on the payroll during that time. Another way a business can be eligible for the credit is if it has at least a 20% reduction in gross receipts during each quarter of 2021.

A new business, which has gross receipts up to $1 million and that began operations on or after February 15, 2020, can also be eligible for the retention credit. New startups can qualify for a credit of up to $50,000 per quarter.

How Can Your Business Claim the Credit?

If you are eligible for the Employee Retention Credit, you can claim it in 2021 by amending your quarterly tax returns. If you use a payroll provider, they can show you how to do this. If you don’t use a payroll provider, Form 941 has a section where you can calculate and subtract the value of the credit.

The credit will reduce the amount of your payroll tax submission, perhaps over several pay periods. In some cases, the value of the credit is more than your tax submissions, and you may get a direct refund from the IRS.

You may also claim the credit retroactively for 2020. Again, contact your payroll provider to see if they have a process to do this, and if not, you can send in an amended Form 941 (941X) to claim the credit.

You may also be able to get an advance payment of the credit from the IRS. File Form 7200 to claim the advance payment.

PPP and the Employee Retention Credit

If your business received a PPP loan and is eligible for the retention credit, it’s important that you don’t “double-dip.” You can’t claim the tax credit for payroll that was covered by the PPP loan. Although both programs are designed to provide financial relief to businesses, they can make things complicated. If you’re not sure what wages were covered by your PPP loan or if you qualify for the Employee Retention Credit, it’s a good idea to speak with a financial professional who can help you decipher the situation.

New Direction Capital’s team of virtual CFOs can help you determine if your business qualifies for the credit and how much it can claim. Our virtual CFOs also work with you to get a better sense of your company’s big-picture finances. If the pandemic has left you uncertain about the future, contact us today to learn more about how we can help you navigate complex financial situations.