Employee Retention Credit

What is the Employee Retention Credit?

The Employee Retention Credit under the CARES Act encourages businesses to keep employees on their payroll and minimizes employees having to file for unemployment. The Consolidated Appropriations Act which was passed in December 2020 and the American Rescue Plan Act was passed in March 2021 made a number of changes to the tax credits which eased the eligibility requirements and extended the program. 

For Q4 2021, the refundable tax credit is up to $50,000 for eligible recovery startup businesses only.  Businesses who are not eligible recovery startup businesses no longer qualify for ERC for any wages paid after September 30, 2021. If you opt-in to claiming the credit, Square Payroll will file your Q4 2021 Form 941 or annual Form 944  with ERC.

Employer Eligibility

Only recovery startup businesses qualify for Q4 2021 ERC on Form 941. Businesses who file quarterly Form 941, who were previously eligible but not classified as a startup recovery business, are no longer eligible for the ERC. Businesses who file annual Form 944 may still be able to claim Q1 - Q3 2021 ERC on Form 944. You can find your federal filing cadence (quarterly Form 941 or annual Form 944) under Tax Info in Square Dashboard or by contacting the IRS. 

To qualify as a Recovery Startup Business, your business must meet both conditions:

• Business started after February 15, 2020.

• Your gross receipts are under $1 million.

Recovery Startup Businesses are eligible for up to $50,000 in credits per calendar quarter in Q3 and Q4 2021.

For businesses who file annual Form 944 and do not qualify as a Recovery Startup Business, your business must meet both conditions:

• Business operations are fully or partially suspended during the calendar quarter due to a COVID-19 related government order OR you experienced a decline in gross receipts (revenue) in the calendar quarter as compared to 2019.

  • For quarters in 2021, revenue must have dropped by more than 20%  (less than 80% of gross receipts) compared to the same quarter in 2019 or to the immediately preceding quarter. 

  • For quarters in 2020, revenue must have dropped by more than 50% compared to the same quarter in 2019. 

• To claim the credit, you must have paid employees in that given quarter. 

Businesses that are eligible due to a decline in gross receipts are eligible for up to $7,000 ERC per employee per quarter for Q1-Q3.

Note: Some government employers and businesses who received the new restaurant revitalization grant are ineligible for the ERC. If you are unsure if your business is eligible for the ERC or need help calculating your decline in gross receipts, we recommend consulting with a tax professional or accountant.

Qualified Wages 

Eligible wages include: 

• Qualified wages for the ERC include the portion of group health plan expenses (including both employer contributions and pre-tax employee contributions) that is allocable to otherwise qualifying wages. The determination of which wages are qualified wages is different depending on whether you are a large or small employer.

• For employers who averaged less than 100 full-time employees during 2019, qualified wages are those paid to any employee during a period in which your operations are fully or partially suspended by order of a governmental authority or during which you have a decline in gross receipts.

• For employers who averaged more than 100 full-time employees during 2019, qualified wages are generally those wages, including certain health care costs, (up to $10,000 per employee) paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

• Cash tips can be treated as qualified wages. Wages claimed with Tip Tax Credit can still be counted as qualified wages.

• Severely financially distressed employers may, regardless of their number of employees, benefit from the broad definition of qualified wages applicable to small employers. All wages paid to employees by a severely financially distressed employer are considered qualified wages. Note: Severely financially distressed employers are defined as employers who had Q3 and Q4 2021 gross receipts of less than 10% of the amount for the same quarter of 2019).

The following types of wages are not eligible for the ERC: 

• Wages paid to majority owner and/or owner’s spouse are not eligible for ERC unless they have no family due to attribution rules.

• Wages paid under the Families First Coronavirus Response Act (FFCRA). These wages can be claimed separately by processing an Emergency Leave Payment through Square Payroll.

• Wages that were paid through a forgiven Paycheck Protection Program (PPP) loan. With the updated guidance for 2021, if you received a PPP loan, you may still qualify for the ERC for any wages not paid from the forgiven portion of your PPP loan.

• Other credits that are not currently supported by Square Payroll include but are not limited to: employees included in the Work Opportunity Tax Credit (WOTC), payroll related expenses as part of the Research & Development (R&D) Credit, shuttered venue grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or a restaurant revitalization grant under section 5003 of the ARP.

Calculate the credit amount

For 2021, the ERC is equal to 70% of up to $10,000 in qualified wages (including amounts paid towards health insurance) per full-time employee for each eligible calendar quarter beginning January 1, 2021 and ending September 30, 2021. If your business is eligible as a non-recovery startup business, the maximum credit is $21,000 per employee ($7,000 per quarter) for the year. If your business is an eligible recovery start up business, the maximum credit you can claim is $50,000 for Q3 and Q4 (total of $100,000).

Once you have confirmed that your business is eligible for the ERC, you can calculate the ERC amount for each eligible quarter in 2021 by following these steps: 

• Step 1: Generate and download an employee totals report for the applicable quarter by following these steps:

  • Visit Payroll > History & Reports in your online Square Dashboard.

  • Click Payroll Reports > select the report type: Employee Totals (XLSX).

  • Select the Pay Date Range. For example, for Q1 2021, select or enter 01/01/2021 - 03/31/2021.

  • Select All Team Members.

• Step 2: Calculate eligible wages for each W-2 employee. 

  • A: If applicable, add (+) employer paid health insurance expenses (reported as ER Benefits Contributions in your Payroll Report). Learn more determining the amount of allocable qualified health plan expenses on the IRS website.

  • B: If applicable, add (+) employee cash tips (reported as Cash Tips).

  • C: If applicable, subtract (-) any wages reported as contractor hours and/or contractor amount.

  • D: If applicable, subtract (-) Families First Coronavirus Response Act (FFCRA) wages (reported as Emergency Paid Sick Leave - Self, Emergency Paid Sick Leave - Others, Emergency Family Leave - Childcare in your Payroll Report).

  • E: If applicable, the maximum qualified employee wages are $10,000 per employee per quarter. For example, if an employee earned $15,000 in total for Q1 2021, the total qualified ERC wages for that employee would only be $10,000.

  • F: Please note, you cannot claim ERC on wages that were paid through a forgiven PPP loan. Claiming the same wages through the ERC and through a forgiven PPP loan is considered “double dipping” which is not allowed per IRS guidelines. Read more about guidance on Employee Retention Credit from the IRS website.

• Step 3: Add (+) all eligible wages for that quarter.

• Step 4: Multiply (x) the total eligible wage amounts by 0.7 (70%).

For example, let’s say you paid three employees within the quarter. Your calculation would look like this:

• Step 1: In reviewing the employee totals report, you have three employees.

  • Employee A earned $5,000 in quarterly wages and had $300 in employer health plan expenses.

  • Employee B earned $15,000 and had no employer health plan expenses. 

  • Employee C earned $12,000 and had $600 in FFCRA wages.

  • No wages were forgiven through a PPP loan.

• Step 2: Calculate eligible wages for each employee (assuming all wages were excluded from PPP forgiveness), see Qualified Wages in the table below.

• Step 3: Total qualified wages are $5,300 + $10,000 + $10,000 = $25,300. $300 of which were qualified health plan expenses.

• Step 4: $25,300 (x) by .7 (70%) = $17,710. $17,710 is the ERC amount you should provide to Square Payroll, along with $25,300 in qualified wages and $300 in qualified health plan expenses.

Claim the ERC through Square Payroll

In order to opt in to Square Payroll claiming and reporting the ERC on your behalf, you must email the Square Payroll Support team by January 7, 2022 for Q4 2021 or annual 2021 filings. 

When contacting the Square Payroll Support team, please include the following information in your request to claim the ERC for your Q4 2021.

For qualified recovery startup businesses who are quarterly (Form 941) filers:

• 1. Confirm your business eligibility. Square Payroll does not have the ability to calculate your business eligibility. If you classify as a startup recovery business, please proceed. If not, you do not qualify for Q4 ERC.

• 2. Confirm if you are classified as a startup recovery business. This applies to businesses who began operations after February 15, 2020,  have an average annual gross receipts of less than $1,000,000 or less, and do not qualify as a fully or partially suspended operation nor experience a decline in gross receipts.

• 3. Calculate your ERC amount.

• 4. Calculate your qualified wages. Your ERC should equal 70% of qualified wages.

• 5. If applicable, calculate your qualified health plan expenses amount. This will be line 22 on your Form 941.

• 6. Confirm if you received advance credits through filing Form 7200 outside of Square Payroll. If yes, please indicate the date you received the credit and the amount.

For eligible employers who are annual (Form 944) filers:

• 1. Confirm your business eligibility. Eligible businesses include recovery startup businesses or businesses who passed the decline in gross receipts test for Q1-Q3 2021.

• 2. Confirm if you are classified as a startup recovery business. This applies to businesses who began operations after February 15, 2020,  and have an average annual gross receipts of less than $1,000,000 or less, and do not qualify as a fully or partially suspended operation nor experience a decline in gross receipts.

• 3. Calculate your ERC amount(s). If you are a startup recovery business, provide your Q3 and Q4 ERC amounts, as separate amounts per quarter. If you are eligible, not as a startup recovery business, provide your total ERC amount for the Q1 - Q3 quarter(s) your business was eligible.

• 4. Confirm your qualified wages. Your ERC should equal 70% of qualified wages.

• 5. If applicable, calculate your qualified health plan expenses amount. This will be line 18 of your Form 944.

• 6. Confirm if you received advance credits through filing Form 7200 outside of Square Payroll. If yes, please indicate the date you received the credit and the amount.

How is the credit applied on Form 941?

If you opt in to having Square Payroll claim the ERC on your behalf, the following information will be reported on applicable quarterly Form 941 filing(s).  The ERC that you provide will be allocated between the non-refundable and refundable lines (Line 11c and 13d) on Form 941. The impacted lines are as follows:

• Line 11c: Non-refundable portion of employee retention credit from line 2h of Worksheet 4. The nonrefundable portion of ERC does not exceed the employer share of Medicare tax (2.9%) on all wages for the quarter.

• Line 13d: Refundable portion of the employee retention credit from line 2i Worksheet 4.

• Line 13h: [If applicable] Total advances received from filing Form(s) 7200 for the quarter.

• Line 15: Overpayment amount. Note: Square Payroll checks the option to “Send a refund” for the overpayment  versus “Apply to next return” as a credit.

• Line 18b: Recovery Startup Business

• Line 21: Qualified wages from line 2a of Worksheet 4.

• Line 22: Qualified health plan expenses from line 2b of Worksheet 4.

Note: Square Payroll will not publish Worksheet 4 as part of your Form 941, as it is used for calculation purposes only.

How is the credit applied on Form 944?

If you opt in to having Square Payroll claim the ERC on your behalf, the following information will be reported on the applicable annual Form 944filing. The ERC that you provide will be allocated between the non-refundable and refundable lines (Line 8c and 10e) on Form 944. The impacted lines are as follows:

• Line 8c: Non-refundable portion of employee retention credit from line 2h of Worksheet 2 or Worksheet 4. 

• Line 10e: Refundable portion of the employee retention credit from line 2i of Worksheet 2 or Worksheet 4.

• Line 10i: Total advances received from filing Form(s) 7200 for the quarter.

• Line 12: Overpayment amount. Note: Square Payroll checks the option to “Send a refund” for the overpayment versus “Apply to next return” as a credit.  

• Line 17: Qualified wages from line 2a of Worksheet 2 or Worksheet 4

• Line 18: Qualified health plan expenses from line 2b of Worksheet 2 or Worksheet 4

• Line 25: Q3 ERC claimed by a Recovery Startup Business

• Line 26: Q4 ERC claimed by a Recovery Startup Business

Note: Square Payroll will not publish Worksheet 2 or 4as part of your Form 944, as it is used for calculation purposes only.

How will I receive the credit from the IRS?

The potential refund you may receive from the IRS will be reported on line 15 of your Form 941 or line 12 of your Form 944 which you can locate under the Tax Forms tab of your Square Dashboard. Please note that Square Payroll will not apply the credit to subsequent returns so you will receive a refund check directly from the IRS once approved.

If you have questions about the timing of the refund, the IRS has listed 800-829-4933 as the best phone number for Business Tax Return refunds.