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Employee Retention Credit

Starting in 2021, Square Payroll has the ability to claim the Employee Retention Credit 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. Note: The deadline for Q1 2021 is pushed back to April 21, 2021. The deadline for Q2 is June 30, 2021, Q3 is September 30, 2021, and Q4 is December 31, 2021. 

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) 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 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 starting in the quarter that you make the request.

For 2020, the refundable tax credit is 50% of up to $10,000 in qualified wages per year paid by an eligible employer whose business was financially impacted by COVID-19. The maximum credit an employer can receive is $5,000 per employee per year.

Employer Eligibility

An employer must meet the 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. 

Note: If your business started after February 15, 2020 and your gross receipts are under $1 million, you may qualify for ERC as a Recovery Startup Business. You do not have to demonstrate a loss in gross receipts in order to qualify for ERC.  Recover Startup Businesses are eligible for a $50,000 credit 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.

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.

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

  • 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, and recipients of the new restaurant revitalization grant and/or the shuttered venues grant.

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, subtract (-) any wages reported as contractor hours and/or contractor amount.

    • C: 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).

    • D: 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.

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

    • 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 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 or call the Square Payroll Support team by 4/21/21 for Q1 2021 filings. Instructions for opting in to claiming the credit for Q2 through Q4 of 2021 will be released before the close of each quarter.

When contacting the Square Payroll Support team, please include the following information in your request to claim the ERC for Q1 2021: 

  • Confirm your business eligibility. Square Payroll does not have the ability to calculate your business eligibility based on your reduction in gross receipts.

  • Calculate your qualified wages amount and, if applicable, qualified health plan expenses amount. If you are using Worksheet 1 to calculate your ERC amount, qualified wages would be line 3a and qualified health plan expenses is line 3b. This information is reported in line 21 and line 22 of your Form 941, respectively.

  • Calculate your ERC amount. You can use the formula above or consult with a tax professional or accountant for guidance. Note: Square Payroll handles filing for ERC from Q1 2021 and onwards. Claiming the ERC for quarters in 2020, requires an amendment.

  • 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.

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 3h of Worksheet 1. The nonrefundable portion of ERC does not exceed the employer share of social security tax (6.2%) on all wages for the quarter.

  • Line 13d: Refundable portion of the employee retention credit from line 3i Worksheet 1.

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

  • Line 21: Qualified wages from line 3a of Worksheet 1.

  • Line 22: Qualified health plan expenses from line 3b of Worksheet 1.

Note: Square Payroll will not publish Worksheet 1as part of your Form 941, as it is used for calculation purposes only.

How will I receive the credit from the IRS?

You will receive a mailed check once Form 941 is processed by the IRS. If the check amount you receive does not exactly match the overpayment shown on Line 15 of your Form 941 on the Tax Forms of your Square Dashboard, we advise contacting us to confirm the credit before cashing the check to avoid penalties/interest.

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