The Employee Retention Credit (ERC) under the CARES Act is a refundable credit that encourages companies to keep their employees on payroll. It provides eligible employers with per-employee credits based on qualified wages and health insurance benefits paid. The ERC is equivalent to 50 percent of the qualifying wages, including qualifying health plan expenses, that an eligible employer pays in a calendar quarter. IAS 20 allows companies to record and present the gross amount as other income or to offset the credit with related payroll expenses.
Every quarter, when a company is reasonably certain that it meets the recognition criteria, it records an account receivable and other net income or expenses. In practice, the AICPA has seen more public companies that apply this model present the credit network, Durak said. The IRS notification is important to understand how to apply the changes to Form 941 needed to apply for credit. In addition, since the creation of the ERTC program, several laws have come into force that influence the way in which credit can be requested.
Companies can no longer pay salaries to apply for the employee retention tax credit, but they have until 2024 and, in some cases, 2025, to analyze their payrolls during the pandemic and apply for the credit retroactively by filing an amended tax return. 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. 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. The credit is allowed against employer participation in social security taxes under section 3111 (a) of the Internal Revenue Code (the “Code”) and the portion of taxes imposed on railroad employers under section 3221 (a) of the Railroad Retirement Tax Act (RRTA) that corresponds to social security taxes under section 3111 (a) of the Code.
Remember that the credit can only be deducted for salaries that are not forgiven or that are expected to be forgiven under the PPP. 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. Qualified ERC salaries include the portion of group health plan expenses (including employer contributions and employee contributions before taxes) that goes to salaries that would otherwise be eligible. The IRS has protective measures to prevent wage increases from being counted for the credit once the employer is eligible to receive the employee retention tax credit. It is important for employers to understand how they can take advantage of this program and maximize their savings.
Companies should review their payrolls during 2020 and 2021 and analyze whether they are eligible for this program. They should also review their payrolls for any wage increases that may disqualify them from receiving this credit. Additionally, employers should ensure they are filing Form 941 correctly in order to receive their credits. Overall, understanding how to apply for and maximize savings from this program can help employers save money during these difficult times.
