The Employee Retention Credit (ERTC) is a refundable tax credit created by the CARES Act to encourage businesses to keep their employees on payroll. It is equivalent to 50% of qualified wages, including certain health insurance costs, paid to employees. This credit is available to employers with 100 or fewer full-time employees, and can be applied retroactively until 2024 or 2025. To determine eligibility for the ERTC, employers must first calculate 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. If the withheld payroll tax deposits are not sufficient to cover the expected credit amount, employers can file Form 7200 (prepayment of employer credits due to COVID-19) to request prepayment of the remaining amount.
Employers can also use all 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. Additionally, 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. The credit is fully refundable because the eligible employer can receive a refund if the amount of the credit exceeds certain federal employment taxes owed by the eligible employer. The amount of the credit is calculated based on a percentage of “qualified wages”, including the attributable qualifying health plan expenses that an eligible employer pays to employees.
Due to its complexities, Thomson Reuters has created an employee retention credit tool to help employers determine if they qualify for the credit. This tool can help employers understand their eligibility and how to apply for the ERTC.