The purpose of the ERC is to encourage employers to keep employees on the payroll, even if they are not working during the period covered due to the effects. There is no application for an employee retention credit. Instead, employers can claim the Employee Withholding Credit on their federal employment tax returns. In most cases, this means claiming the credits on Form 941, Employer's Quarterly Federal Tax Return.
The ERC is a refundable credit that businesses can claim for qualified wages, including certain health insurance costs, paid to employees. Get the basics of creating an employee recognition program that encourages employee engagement and helps them feel valued. Employers reported total qualified wages and employee retention credit related to COVID-19 on Form 941 for the quarter in which qualifying wages were paid. An eligible employer could reduce their employment tax deposits during the quarter by the amount of credit anticipated for the quarter.
Credits represent 70% of eligible wages and associated expenses of the qualified health plan paid to employees. The credit is fully refundable because the eligible employer can receive a refund if the amount of the credit is greater than certain federal employment taxes owed by the eligible employer. Remember that you will not qualify for a withholding credit if you received or if any member of your aggregate group received a PPP loan, regardless of how much of that loan is forgiven. Instead, the employer must reduce the wage deductions on your income tax return for the tax year in which you are an eligible employer for ERC purposes.
The PEO will also need to separately file a Schedule R just for employers claiming the credit to allocate the credit appropriately. In addition, the IRS has designed an expedited refund process if these credits still exceed the employer's total payroll tax. For more information on how to apply for the refundable employee retention credit, see How to Claim the Employee Retention Credit. If your federal employment taxes don't cover your payments, you can complete Form 7200, Prepayment of Employer Credits Due to COVID-19, to request an advance on credits.
The retroactive termination of the Employee Retention Credit caused a lot of confusion and concern about penalties for both business owners and accountants. The Employee Retention Credit is available to churches and other faith-based organizations that were affected by government-mandated capacity restrictions for meetings or experienced significant decreases in gross revenues. ERC credits are calculated based on eligible wages paid to employees during eligible employer status. Employers can immediately take advantage of advance payments by filing Form 7200 to receive these excess payroll tax credits.
This means that the credit will serve as an overpayment and will be refunded to you after subtracting your share of those taxes.