The Employee Retention Credit (provision of the CARES Act) is extended under the recently passed American Rescue Plan (ARP) Act and previously under the Consolidated Appropriations Act of 2021. Eligible employers who have retained employees during the COVID-19 pandemic can claim Employee Retention Tax Credit through December 31, 2021.
What Is Meant By Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable credit that businesses can now claim on qualified wages, including specific health insurance costs paid to employees.
Which Employers Qualify For The Employee Retention Tax Credit?
Most employers, including universities, colleges, 501(c) organizations, and hospitals after the enactment of the American Rescue Plan Act can now qualify for employee retention credit. The Consolidated Appropriations Act extended the qualifications to include companies that took a Paycheck Protection Program (PPP) loan, including PPP initial round borrowers who were ineligible to claim the employee retention credit.
What Wages Qualify When Calculating Employee Retention Tax Credit?
Wages subject to FICA taxes and qualified health expenses qualify when calculating the tax credit. The credits can only be taken on wages that are not forgiven or expected to be forgiven under the Paycheck Protection Program.
The IRS has several ways of calculating when determining the qualified health expenses that include the employer and employee pre-tax portion. When determining the qualified wage that could be included, the employer should first determine the number of full-time (FT) employees.
An FT employee is a person who has worked at least 30 hours per week or 130 hours per month in any calendar month in 2019. The employee calculation of the FT equivalent used for the Paycheck Protection Program forgiveness report is not calculated the same way as an FT employee for employee retention credit.
How Does The Employee Retention Tax Credit Work?
The ARP Act stipulates that the non-refundable pieces of employee retention credit would be claimed against Medicare taxes rather than against Social Security taxes, as was the case in 2020. This change applies to wages paid after June 30, 2021 only and will not change the total employee retention credit amount.
If the tax credit exceeds the employer's total liability of the Social Security or Medicare portion, depending on if it is before June 30, 2021, or later in any calendar quarter, the excess will be refunded to the employer. At the end of the quarter, the tax credits amounts are reconciled on the employer's Form 941.
How Do Businesses Claim The Employee Retention Tax Credit Retroactively?
The IRS released Notice 2021-20 on March 1, 2021, which guides employers claiming the Employee Retention Tax Credit. The notice only guides employee retention credit as it applies to the qualified wages paid between March 12, 2020 and January 1, 2021.
The notice specifies how employers who have received a PPP loan can claim the Employee Retention Tax Credit retroactively. To claim ERTC for past quarters, the employers must submit Form 941-X, which is Claim for Refund or Adjusted Employer's Quarterly Federal Tax Return, for the applicable quarters in which the qualified wages have been paid.
Conclusion: How does a PEO client employer reconcile?
Employers using a Certified Professional Employers Organization (CPEO) or Professional Employers Organization (PEO) do not have an individual 941 filed on their behalf. Therefore, the employers must understand how they will reconcile this information and receive the Employee Retention Tax Credit. If an eligible employer uses a CPEO or PEO, the employee retention credit will be reported on the PEO/CPEO aggregate Form 941 and Schedule R.
