How is employee retention credit calculated?

The employee retention credit under the CARES Act encourages companies to keep employees on their payroll. The IRS has established barriers to avoid wage increases that would be included in the credit once the employer is eligible for the employee retention tax credit. The employer cannot apply for the benefit under the Employee Retention Credit and the Small Business Interruption Loan under the Paycheck Protection Program. Employers with 100 or fewer full-time employees can use all the salaries of working employees, as well as any paid time off work, with the exception of paid vacation provided for in the Families First Coronavirus Response Act.

The calculation of the Employee Retention Credit (ERCC) is one of the most successful tax measures to help small and medium-sized businesses. To apply for the credit for previous quarters, employers must file Form 941-X, Employer's Adjusted Quarterly Federal Tax Return or Refund Request, for the applicable quarters in which qualified wages were paid. This law allowed companies most affected by a serious financial crisis to apply for credit against the qualified salaries of all employees, and not just those who did not provide services. Leave under the FFCRA included paid sick leave and family leave, which, when taken under the provisions of the law, offered businesses the opportunity to apply for a tax credit.

You may be entitled to a credit during this period if you continued to pay employees who weren't working. The IRS provides Form 7200 for early payment of tax credits for eligible family and sick leave, the employee retention credit and the COBRA premium assistance credit. The IRS notice is important to understand how to apply the changes to Form 941 needed to apply for credit. Although the Employee Retention Tax Credit (ERTC) program has officially expired, this does not affect a company's ability to apply for the ERTC retroactively.

Also, remember that if a customer has applied for and will be forgiven for a PPP loan, they may now be entitled to the employee retention credit on certain salaries. BDO helps companies identify, negotiate and obtain tax credits and incentives, including retroactive and future opportunities, to minimize total tax liability and increase business cash flow. Make sure you have all your taxes, payroll, capital expenses, and other documents ready to get credit. Previously, the Consolidated Appropriations Act expanded the requirements to include companies applying for a loan under the Paycheck Protection Program (PPP), including borrowers from the initial round of PPP who were not originally eligible to apply for the tax credit.