Employee Retention Credit
Starting in 2021, Square Payroll has the ability to claim the Employee Retention Credit (ERC or ERTC) on Form 941 on behalf of employers.
To opt-in to claiming the Employee Retention Credit, please contact the Payroll Support team by the end of the current quarter in which you would like to claim the credit. The deadline for Q3 is October 7, 2021. The deadline for Q4 is January 7, 2022.
Square Payroll does not currently handle any retroactive 2020 or 2021 amendments to claim ERC for prior quarters at this time. Please consult your CPA or tax advisor if you would like to retroactively claim ERC on any prior quarters.
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 them through the end of 2021.
For 2021, the refundable tax credit is 70% of up to $10,000 in qualified wages per quarter paid by an eligible employer whose business has been financially impacted by COVID-19. The maximum credit an employer can receive is $7,000 per employee per quarter (or $28,000 per employee per year). If you opt-in to claiming the credit, Square Payroll will file 2021 Form 941s with ERC in the quarter that you make the request.
Potential update to keep in mind for Q4 2021 ERC: The proposed Infrastructure Bill by the US Senate could potentially make any wages paid after September 30, 2021 ineligible for ERC. The only exception would be for wages paid by an eligible Recovery Startup Business (RSB). This has not yet been finalized and does not impact Q3 2021 ERC purposes.
An employer must meet the following conditions to be eligible:
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.
If your business started after February 15, 2020, your gross receipts are under $1 million, and you do not qualify as an eligible employer due to a full or partial suspension of operations or a decline in gross receipts, you may qualify for ERC as a Recovery Startup Business. Recovery Startup Businesses are eligible for up to $50,000 in credits per calendar quarter in Q3 and Q4 2021.
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.
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 December 31, 2021. If your business is eligible for all four quarters in 2021, the maximum credit is $28,000 per employee ($7,000 per quarter) for the year.
For 2020, the credit is equal to 50% of up to $10,000 in qualified wages (including amounts paid towards health insurance) per full-time employee for all eligible calendar quarters beginning March 13 and ending Dec. 31, 2020. For 2020, the maximum credit is $5,000 per employee for the year.
Once you have confirmed that your business is eligible for the ERC, you can calculate the ERC amount for each 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.
|Employee||Qualified Wages||Employee Retention Credit|
|Employee A||$5,300 ($5,000 wages + $300 ER health plan expenses)||$3,710 ($5,300 x .70)|
|Employee B||$10,000 ($15,000 exceeds max of $10,000 in qualified wage)||$7,000 ($10,000 x .70)|
|Employee C||$10,000 ($12,000 - $600 = $11,400 but exceeds max of $10,000 in qualified wages)||$7,000 ($10,000 x .70)|
|Total||$25,300 qualified wages ($300 in health plan expenses)||$17,710 credit amount|
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 October 7, 2021 for Q3 2021, and January 7, 2022 for Q4 2021.
When contacting the Square Payroll Support team, please include the following information in your request to claim the ERC each quarter:
1. Confirm your business eligibility. Square Payroll does not have the ability to calculate your business eligibility.
2. Are you 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. You can use the formula above or consult with a tax professional or accountant for guidance. This amount should be calculated on a quarterly basis. Note: Payroll currently does not handle any retroactive 2020 or 2021 amendments for prior quarters at this time. Please consult your CPA or tax advisor if you would like to retroactively claim ERC on any prior returns.
4. Calculate your qualified wages. This will be on line 21 on your Form 941.
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. Filing Form 7200 is optional. If you do not report any amounts from Form 7200 to Square Payroll, we will assume you did not file this form. Advance credits from Form 7200 must be reported based on the date you receive the advance credit from the IRS, not the date in which you filed the request.
7. Confirm if you claimed a credit for qualified sick and family leave wages for leave in Q3 2021 for leave taken after March 31, 2021. If yes, provide the employer share of Medicare tax remaining on Worksheet 4, line 1a and the non-refundable portion of the credit remaining on Worksheet 4, line 2f.
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. These specifically include:
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 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 which you can locate under the Tax Forms tab of your Square Dashboard. lease 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.