Qualifying for Employee Retention Credit: A Guide

The COVID-19 pandemic has been a difficult time for many businesses, and the government responded by creating the Employee Retention Credit (ERC). This refundable tax credit was designed to help small businesses keep their employees on payroll during the pandemic. To qualify for the credit, employers must meet certain requirements and understand how to apply for it. This guide will explain how to qualify for the Employee Retention Credit and how to apply for it.To qualify for the Employee Retention Credit, employers must have experienced a total or partial suspension of operations due to COVID-19 or have experienced a significant decrease in gross income.

Qualifying wages cannot exceed what would have been paid to the employee during the 30 days immediately prior to the total or partial suspension of operations or the first day of the calendar quarter in which the employer experienced a significant decrease in gross income. Qualified wages do not include FMLA payments and sick leave wages required under the Families First Coronavirus Response Act, salaries for which the employer requests a credit for paid family medical leave under section 45S, or the salary of an employee of the Work Opportunity Tax Credit. 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.For employers who meet these requirements, they can request the Employee Retention Credit by reducing their payroll tax deposits and reconciling these amounts on Form 941 quarterly. To help employers determine if they qualify for the credit, Thomson Reuters has created an Employee Retention Credit Tool.

Business owners who weren't recovering startups weren't eligible for the Employee Retention Credit for wages paid after September 31.If an employee's salary is maintained, but their working hours are reduced, the payment for hours not worked can be used to support a retention credit. Employers who receive an Employee Retention Credit cannot deduct the portion of the salary paid, including allocable health care costs, equal to the credit.The Employee Retention Credit under the CARES Act encourages companies to keep employees on their payroll. For these employers, a portion of an employer's business is considered greater than a nominal share of operations if the gross revenues of that part of business operations 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.

Denise Lefler
Denise Lefler

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