Understanding the Employee Retention Credit and Its Requirements

The Employee Retention Credit (ERC) is a tax credit available to eligible employers in response to the COVID-19 pandemic. This credit is designed to help employers retain their employees and cover certain wages paid to them. To qualify for the ERC, employers must meet certain criteria, including having 100 or fewer full-time employees. The ERC is available to employers who have experienced either a total or partial suspension of operations due to government orders or a significant decrease in gross income.

Employers with 100 or fewer full-time employees can use all the 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. Wages paid to related persons, as defined in section 51 (i) of the Internal Revenue Code (the Code), are not considered for the purposes of the employee retention credit. Payments made in connection with the termination of a former employee's employment relationship are also not qualifying wages because they are payments from the previous employment relationship and, therefore, cannot be attributed to the time during which the employee retention credit can be requested. For an employee who does not have a fixed working schedule, the hours during which the employee does not provide services can be determined using any reasonable method.

Reasonable methods include the method (or methods) that the employer uses to measure the right of exempt employees to intermittent or reduced leave under the Family and Medical Leave Act, or the method that it uses to measure the right of exempt employees to paid vacation and the use of such leave according to the employer's standard practices. For employees who are not providing services due to the closure of their branch office, but who receive 50 percent of their normal hourly wage, employer T can treat the wages paid as qualifying wages for the purposes of the employee retention credit. The minister's salary and stewardship allowance do not constitute salaries within the meaning of section 3121 (a) of the Code and, therefore, are not qualifying salaries for the purposes of the employee retention credit. 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.

For more information on how to qualify for and apply for this credit, visit Cherry Bekaert's ERC Guidance Center or contact Martin Karamon.