The employee retention credit (ERC) is a fully refundable tax credit for employers that is equivalent to 50 percent of qualified wages (including allocable qualified health plan expenses) paid to their employees. This credit reduces a person's final tax bill dollar for dollar by applying it to the amount of tax due after all the exclusions from the tax liability have been made. Companies that have applied for a Paycheck Protection Program (PPP) loan and will be forgiven for it may now be eligible for the retention credit for employees with certain salaries. The ERC under the CARES Act encourages companies to keep employees on their payroll.
Any percentage of credit requested on Form 941 for the small business payroll tax credit eligible to expand research activities has been deducted. Employers who knew how to apply for the employee retention credit before the initiative was suspended used Form 7200. Eligible employers, including PPP beneficiaries, can apply for a credit against 70% of qualified wages paid. Employers with 100 or fewer full-time employees can use all the salaries of employees who work, as well as any paid time that they are not working, with the exception of paid vacation provided under the Families First Coronavirus Response Act.
On Form 941, any portion of the credit remaining for eligible sick and paternity leave payment at the end of the quarter that exceeds the employer's share of the quarter's Medicare taxes is recovered as a non-refundable credit. Employers who use a Professional Employers Organization (PEO) or a Certified Professional Employer Organization (CPEO) do not file an individual 941 on their behalf, so it's important that they understand how they would reconcile this information and receive credit. The IRS has protective measures to prevent wage increases from being counted for the credit once the employer is eligible to receive the employee retention tax credit. Leave under the FFCRA included paid sick leave and family leave, which, when taken under the provisions of the law, offered businesses the opportunity to apply for a tax credit. The purpose of the ERC was to encourage employers to keep employees on the payroll even if they weren't working during the period covered due to the effects of the coronavirus outbreak.
The ERC is no longer available, but there is still time to apply for the periods it covered if you haven't already.