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Employee Retention Credit Eligibility Requirements

ERC-Eligibility-Requirements

As a business owner, I understand the challenges that come with keeping operations running during these uncertain times. The COVID-19 pandemic has had a significant impact on businesses across the world, with many struggling to maintain their operations due to government restrictions and declining revenues.

In response, the US government passed the CARES Act, which provides eligible employers with a refundable payroll tax credit for certain wages paid to employees. The employee retention credit is designed to help businesses keep their doors open and retain their employees during this difficult time.

However, employee retention credit eligibility requirements can be confusing and complex. In this article, we will outline who qualifies for the ERC, including the types of employers that qualify, the period of time covered by the credit, and the wages that are eligible for the credit. We will also discuss how to calculate and claim your credit so you can take advantage of this valuable benefit for your business.

employee retention credit eligibility requirements

CARES Act Overview

The CARES Act provides eligible employers with a refundable payroll tax credit for certain wages paid. This includes 50% of up to $10,000 of qualified wages paid in 2020 and 70% of up to $10,000 of qualified wages paid in 2021. To access these funds, employers can reduce their employment tax deposits.

Eligible employers include tax-exempt organizations that operated a trade or business during calendar year 2020 and experienced either a full or partial suspension of operation due to governmental orders limiting commerce, travel, or group meetings due to COVID-19 or significant decline in gross receipts.

The employer must consider how the government order affects their business operations and the period that the order is in place. Examples of governmental orders include mayor’s order closing non-essential businesses, state shelter-in-place orders, and government curfews affecting operating hours.

For businesses with teleworking employees, they’re not considered to have a suspension of operations. On the other hand, for businesses experiencing a significant decline in gross receipts, this refers to the period beginning with the first calendar quarter in 2020 for which gross receipts were less than 50% compared to those from the same quarter in 2019 and ending with either January 1st, 2021 or the first quarter after which gross receipts are greater than 80% compared to those from the same quarter in 2019.

Qualified Wages

During the pandemic, businesses had to navigate through governmental orders and significant declines in gross receipts to determine which wages were eligible for the tax credit. Qualified wages are those that are paid between March 12, 2020, and January 1, 2021, during a period of full or partial suspension of operations due to COVID-19 or a significant decline in gross receipts. These wages must also be subject to Medicare tax and cannot exceed what the employee would have been paid during the 30 days immediately before the suspension or decline.

It’s important to note that group health plan costs properly allocable to wages can also be included as qualified wages. However, PTO, vacation pay, and sick pay don’t count as qualified wages when an employee isn’t providing services.

For employers with more than 100 full-time employees in 2019, only amounts paid when an employee isn’t providing services due to suspension or significant decline in gross receipts qualify for the credit. Employers averaging 100 or fewer full-time employees in 2019 can claim all qualifying wages paid during a period of suspension or significant decline in gross receipts.

To support retention credit payment for hours not worked may also be used. However, it’s important to ensure that qualified wages don’t include payments mandated by Families First Coronavirus Response Act (FFCRA) such as paid FMLA and sick leave pay wages nor should they include Worker Opportunity Tax Credit employee’s wages. Similarly, payments made to former employees and related parties’ salaries are excluded from qualified wages criteria.

Employers can access funds by reducing payroll tax deposits and reconciling on quarterly Form 941; if deposits are insufficient then Form7200 can be filed for advance payment of credits. Third-party payers who employ common law employees may also be entitled to credit but can’t claim it themselves under current regulations.

Eligible Employers

You can access funds for the payroll tax credit by reducing employment tax deposits if you’re an eligible employer. To qualify, you must have operated a trade or business during calendar year 2020 and experienced either a full or partial suspension of operations due to COVID-19 governmental orders, or a significant decline in gross receipts. This includes tax-exempt organizations that meet the criteria.

It’s important to note that when determining eligibility based on governmental orders, employers must consider how the order affects their business operations and for what period of time it was in place. Some examples of governmental orders include mayor’s orders closing non-essential businesses, state shelter-in-place orders, and government-imposed curfews affecting operating hours. Businesses with teleworking employees are not considered to have a suspension of operations for this purpose.

If you meet the eligibility requirements as an employer, you may be able to access refundable payroll tax credits for certain wages paid to employees. The amount of credit depends on when the wages were paid and whether they were subject to Medicare taxes. Qualified wages can be used to support retention credit, but there are limitations on what types of payments can be included as qualified wages.

It’s important to understand these restrictions before claiming any credits on your Form 941 quarterly tax return.

employee retention credit eligibility requirements

Governmental Orders

Don’t miss out on accessing funds for the payroll tax credit if your business was affected by governmental orders due to COVID-19. It’s important to understand how the government order affects your business operations and the period of time that it is in place.

For example, a mayor’s order closing non-essential businesses, a state shelter-in-place order, or a government curfew affecting operating hours are all considered governmental orders. If your business experienced either full or partial suspension of operation due to these governmental orders limiting commerce, travel, or group meetings due to COVID-19, you may be eligible for the employee retention credit.

Additionally, if there was a significant decline in gross receipts during this time period beginning with the first calendar quarter in 2020 for which gross receipts were less than 50% of gross receipts from the same quarter in 2019 and ending with earlier of January 1, 2021 or first quarter after quarter for which gross receipts are greater than 80% of gross receipts for the same quarter in 2019.

It’s important to keep accurate records and documentation regarding these orders as they relate to your business operations and revenue. By doing so, you can ensure that you meet all eligibility requirements and maximize your access to funds through the employee retention credit program.

Significant Decline in Gross Receipts

If your business has experienced a significant decline in gross receipts due to the pandemic, it’s important to understand how this can impact your access to funds through the payroll tax credit program.

To be eligible for the employee retention credit, employers must have experienced a significant decline in gross receipts during a specific period of time. This period begins with the first calendar quarter in 2020 where gross receipts are less than 50% of gross receipts from the same quarter in 2019 and ends with either January 1, 2021 or the first quarter after the quarter where gross receipts are greater than 80% of gross receipts for the same quarter in 2019.

It’s important to note that not all businesses will qualify based on this requirement alone. Employers must also consider whether they’ve had any periods of full or partial suspension due to governmental orders limiting commerce, travel, or group meetings as a result of COVID-19.

If so, wages paid during these periods may also be eligible for the employee retention credit. Additionally, businesses with teleworking employees are not considered to have had a suspension of operations.

Employers should carefully evaluate their eligibility under both criteria before claiming any credits. It’s important to keep accurate records and consult with tax professionals if needed.

By taking advantage of available resources like payroll tax credits, businesses can better weather financial challenges brought on by COVID-19 and emerge stronger on the other side.

Calculating and Claiming Credit

Calculating and claiming the payroll tax credit can be a bit complicated, but it’s worth taking the time to understand how it works so you can access the funds your business needs.

To calculate the employee retention credit, eligible employers must determine the amount of qualified wages paid during the period of suspension or significant decline in gross receipts. Qualified wages include Medicare wages paid after March 12, 2020, and before January 1, 2021.

For employers that averaged 100 or fewer full-time employees in 2019, all qualifying wages paid during the period of suspension or significant decline in gross receipts are eligible for credit. For larger employers with more than 100 full-time employees in 2019, qualified wages only include amounts paid when an employee is not providing services due to the suspension or significant decline in gross receipts.

It’s important to note that PTO, vacation pay, and sick pay are not considered wages paid when an employee is not providing services. To claim the credit, eligible employers reduce payroll tax deposits by the estimated amount of their anticipated credit. This reduction is reflected on quarterly Form 941 as a line item adjustment.

If employer’s tax deposits are insufficient to cover their anticipated credit, they may file Form 7200 for advance payment of this credit. Third-party payers may also be entitled to claim this payroll tax credit for any common-law employees who qualify; however, they themselves are not eligible for this credit.

Limitations and Exclusions

Now that we’ve discussed how to calculate and claim the employee retention credit, it’s important to understand its limitations and exclusions. While this credit can provide significant financial relief for eligible employers, there are certain restrictions in place to ensure that it’s being used appropriately.

Firstly, it’s important to note that qualified wages can’t exceed what the employee would’ve been paid during the 30 days immediately before the suspension or significant decline in gross receipts.

Secondly, payments made to former employees and wages paid to related parties don’t qualify for this credit.

Lastly, while PTO, vacation pay, and sick pay are generally not considered wages when an employee is not providing services, they also don’t count towards qualified wages for this credit.

It’s crucial for employers to keep these limitations and exclusions in mind when applying for the employee retention credit. By following these guidelines, eligible employers can receive the maximum benefit from this program while ensuring that it’s being used in a responsible manner.

Overall, understanding these restrictions will help employers make informed decisions about utilizing this valuable resource during these challenging times.

Conclusion

Overall, the employee retention credit provided by the CARES Act is a valuable resource for eligible employers struggling to maintain their operations during the COVID-19 pandemic. By understanding the eligibility requirements outlined in this article, businesses can take advantage of this refundable payroll tax credit and potentially save thousands of dollars in wages paid to employees.

It’s important to note that claiming the employee retention credit requires careful calculation and documentation of qualified wages and eligibility criteria. Businesses should consult with their tax professionals to ensure they’re accurately calculating and claiming the credit, as well as staying up-to-date on any changes or updates to eligibility requirements.

With proper planning and attention to detail, eligible employers can utilize this credit to alleviate some of the financial burdens caused by the ongoing pandemic.

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