The Employee Retention Credit (ERC) was established by the federal government to help businesses cover the cost of keeping staff employed during the COVID-19 pandemic. This refundable tax credit was available to small businesses and allowed them to reduce their payroll tax deposits by the amount of credit expected for the quarter. The purpose of the ERC was to encourage employers to keep employees on their payroll even if they weren't working due to the effects of the coronavirus outbreak. Business owners who weren't recovering startups were eligible for the Employee Retention Credit for wages paid after September 31. To qualify for the credit, a portion of an employer's business must have gross revenues that are not less than 10% of gross revenues (determined by the same calendar quarter of 2018) or if the hours of service performed by the employee are that part of the company no less than 10% of the total number of hours of service performed by all employees of the employer's company. Employers reported the total qualifying wages and the employee retention credit related to COVID-19 on Form 941 for the quarter in which the qualifying wages were paid. If the amount of credit exceeded the employer's share of those federal payroll taxes, it was treated as an overpayment and reimbursed to the employer.
If withheld payroll tax deposits were not sufficient to cover the expected credit amount, employers could file Form 7200 (prepayment of employer credits due to COVID-19) to request prepayment of the remaining amount of credit. The credit was applied to their share of employee's Social Security taxes and was fully refundable. To help employers determine if they qualify for the credit, Thomson Reuters has updated their employee retention credit tool. Employers must first determine their total qualifying wages, including attributable qualifying health plan expenses, that are paid to each employee per quarter. Then, they can use this tool to calculate their eligibility for the ERC. The Employee Retention Credit is a great way for small businesses to keep their employees on payroll during these difficult times.
However, it is important to understand all eligibility requirements and use available tools to ensure you are taking full advantage of this credit.