Do Employers Have to Repay the Employee Retention Credit?

The employee retention credit (ERC) is a fully refundable tax credit that eligible employers can request to cover certain payroll taxes. It's not a loan and doesn't have to be repaid. Generally, the refundable credit exceeds the payroll taxes paid in a credit-generating period. The ERC covers qualifying salaries, including certain health insurance costs, paid to employees.

Previously, the Consolidated Appropriations Act expanded the requirements to include companies that applied for a loan under the Paycheck Protection Program (PPP), including borrowers from the initial round of the PPP who were not originally eligible to apply for the tax credit. This law increased the employee limit to 500 to determine what salaries are applicable to the credit. People who have more than 100 full-time employees can only use the qualified salaries of employees who do not provide services due to the suspension or decline of business activity. In addition, several laws since then (for example, you can apply for the Paycheck Protection Program loan, apply for the employee retention credit, and apply for the paid leave credit from the FFCRA). If you choose to apply for the employee retention credit and the credits for paid vacation, you won't be able to apply for those credits with the same salary.

Because you can only apply for paid vacation credits on paid vacation wages, you cannot apply for the employee retention credit on paid vacation wages from the FFCRA. Eligible employers, including PPP beneficiaries, can apply for a credit against 70% of qualified wages paid. Employers who use a Professional Employers Organization (PEO) or 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. 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. The employee retention credit under the CARES Act encourages companies to keep employees on their payroll. So when it comes to a PPP loan versus an employee retention credit, which one should you choose? Thanks to the Consolidated Appropriations Act, you no longer have to choose.

You can now apply for the ERC and apply for a PPP loan. If you receive an advance on the credits (using Form 7200), you must account for that amount when you file your federal employment tax return. Consequently, it is important to ensure that all eligible expenses, including non-payroll costs, such as utility, rent and operating expenses, to name a few, are included in PPP loan forgiveness requests in order to maximize the qualifying salaries available to the ERTC. Remember that if a customer has applied for a PPP loan and will be forgiven for it, they can now be eligible for the employee retention credit with certain salaries. It allows employers who are required to provide paid leave due to the coronavirus to receive a tax credit in the amount of paid leave wages. While the Employee Retention Tax Credit (ERTC) program has officially expired, this does not affect a company's ability to apply for the ERTC retroactively.

Denise Lefler
Denise Lefler

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