What is Employee Retention Credit and How Do I Account for It

Eligible employers can receive a refundable credit equal to up to 9% of their qualifying wage costs in 2020 and 12% of their costs in 2021 through the Earned Revenue Credit (ERC) program. The qualified-wage cap of an employee determines the maximum credit. You should consider which accounting standard determines revenue recognition if your business qualifies for the ERC.

The ERC is regarded as a conditional grant because an organization can only transfer assets after it has cleared the qualification hurdle for qualified improvement property. One of two criteria is used to determine an employer's qualification for a tax credit, and both must be met during the calendar quarter in question.

A government order may cause the facility to close completely or in part

If the business owners or the company were required to completely or partially suspend operations or restrict business hours, the ERC might be applicable. According to the IRS, the businesses do not fit this description and are therefore ineligible. Until their supply of essential goods is disrupted to the point where they are unable to function, those considered critical. Businesses that had been forced to close by their owners were able to virtually continue operations thanks to telework.

Gross revenue has sharply decreased

The company's gross receipts must have been cut in half when comparing a quarter. Businesses must have experienced a greater than 20% decline in gross revenues in Q1 and Q2 of 2022 compared to the corresponding quarters of the 2020 reference period. If the company is new, the IRS permits it to use the first quarter's gross revenues as a baseline for any quarter for which it lacks 2020 data for federal purposes.

Reduced Deductible Wages as a result of Employee Retention Credit?

The Section 199A deduction may be restricted for some owners of pass-through businesses, increasing their effective federal tax rate from 30% to 37%, according to a closer examination of the IRC and regulations. The Tax Cuts and Jobs Acts (TCJA) included the Section 199A deduction as a compromise for owners of pass-through businesses in response to the significant public outcry regarding the anticipated reduction of the corporate tax rate from 35% to 21%.

Although the government refused to directly lower the tax rates for owners of pass-through businesses, they did create a fictitious deduction of up to 20% for pass-through business revenue if certain conditions were met. By taking advantage of the deduction provided by Section 199A, the owners of pass-through entities may be able to lower their effective tax rate from the federal level, where it currently stands at 37%, to around 30%.

Conclusion

Although the Employee Retention Credit itself is not subject to tax, several factors must be taken into account when filing your taxes. For this reason, you should search for your taxable income, particularly when your income was impacted by COVID-19.

Learn more about the ERTC advance program and how to check if your business qualifies for this IRS incentive. Getting the ERC can benefit your business and provide financial relief from costs associated with COVID-19.