The Employee Retention Tax Credit (ERTC) is a provision of the federal CARES Act designed to encourage employers to retain workers and keep them on payroll during the pandemic. This credit is a refundable payroll tax credit that gives employers a break from having to pay out a portion of the Social Security and Medicare taxes due for each employee kept on the payroll for a period of eligible employment.
It is important for employers to have an understanding of this type of tax credit and its various rules and stipulations as ERTC can be a helpful way to offset some of their payroll costs during these tough times.
Definition of ERTC
The Employee Retention Tax Credit (ERTC) was created by the CARES Act and is designed to assist businesses in staying afloat during challenging economic times. It provides a refundable tax credit of up to $5,000 per employee for employers that have experienced a decline in gross receipts. To qualify, businesses must have suffered a drop in gross receipts of more than 50%.
Essentially, the ERTC is a refundable tax credit against certain employment taxes equal to 50% of qualified wages paid by eligible employers since the start of 2020 or after March 12, 2020 (when the President declared a national emergency). Qualified wages cannot exceed $10,000 in total payments per employee; however, any payments reported on Form 1099s are not considered wages and thus cannot be included when calculating the credit amount.
There are two parts to the Employee Retention Tax Credit – an “eligible employer” portion and an “eligible wage” portion. In order to qualify as an eligible employer, businesses must meet one of two criteria: they must either have been completely or partially suspended due to governmental orders related to COVID-19 or experienced a drop in gross receipts compared with their same quarter from 2019. To qualify for the “eligible wage” portion, employers must pay their employees at least 60 days following the declaration of COVID-19 being declared as a national emergency (Feb 15th), with no upper limit set for payment amounts for each employee. The total amount that each individual may receive from this tax credit is capped at $5,000 per year.
Overview of ERTC
The Employee Retention Tax Credit (ERTC) is a tax incentive from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The ERTC encourages employers to keep employees on the payroll by providing eligible businesses with a refundable payroll tax credit that can be used to offset their quarterly employment taxes.
Under the CARES Act, businesses with 500 or fewer employees, including nonprofit organizations and self-employed individuals, may qualify for credits against payroll taxes – the Employer’s portion of Social Security Tax – to reimburse wages paid between March 13 through December 31, 2020.
The credit is available for up to 50 percent of qualified wages plus applicable healthcare costs paid by employers up to certain limits established by Congress:
- Up to $5,000 in total qualifying wages ($10K for qualified health plan expenses) for each employee on average during 2020
- Up to $7,000 of wages and health coverage per employee
- A maximum of $10K in total credits
- A maximum of 10 employees can be covered per business
Credits are refundable; meaning an employer can receive the cash value even if they do not owe any employment taxes. However, once received, the taxpayer must reduce their net income by an amount equal to any ERTC amounts received.
To determine if you are eligible for the ERTC program you should review your payroll records each quarter and consult with a CPA or competent tax adviser before submitting your return or filing claim forms that require this information.
In order to be eligible for Employee Retention Tax Credit (ERTC), businesses must meet certain criteria. These criteria are related to the business’s size, wages, and wages paid by the business. Additionally, ERTC requires businesses to demonstrate that their operations were impacted by the Coronavirus pandemic in order to be eligible. This section will cover the various eligibility requirements for ERTC.
The criteria for ERTC eligibility include:
- Business size
- Wages paid by the business
- Wages paid to employees
- Demonstrating that operations were impacted by the Coronavirus pandemic
The Employee Retention Tax Credit (ERTC) allows employers to retain qualifying employees’ wages and makes them eligible for a refundable tax credit against certain employment taxes up to and equal to 50% of their wages paid by their employers after March 13, 2020, and before January 1, 2021.
In order for an employer to qualify for the ERTC, they must meet certain eligibility requirements. Eligible employers must have had operations fully or partially suspended due to orders from an appropriate governmental authority limiting commerce or operations due to the COVID-19 pandemic during 2020 and experienced a significant decline in gross receipts in a calendar quarter as compared to the same calendar quarter in 2019.
Furthermore, employers who receive relief under the Paycheck Protection Program (PPP) are still eligible for the ERTC but only if all PPP funds received were already used in accordance with applicable rules. Employers who qualify will also be limited on entering into new agreements or modifying existing agreements with regard to qualified wages during a taxable year beginning after December 31, 2020, and before April 1, 2021.
Regarding qualifying wages, all wages paid by an eligible employer between March 13th, 2020, and December 31st, 2020 that are not excluded from being taken into consideration qualify for Employee Retention Tax Credit (ERTC). The maximum limit of creditable qualified wages per employee is $10,000 dollars per calendar quarter while each employer’s total credit cannot exceed $5 million dollars per taxable year.
In order to qualify for the Employee Retention Tax Credit (ERTC), employers must meet certain eligibility requirements. Employers of any size including tax-exempt organizations are eligible for the ERTC if either of the following applies:
- The employer experienced a full or partial suspension of operations due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
- The employer experienced a significant decline in gross receipts compared to the same quarter in 2019 of at least 50%. For example, if their gross receipts were 20% lower than the same quarter in 2019, they would not qualify.
Tax-exempt employers may also be eligible on a different basis. If they applied for and receive a Paycheck Protection Program loan during 2020 and subsequently canceled it during 2020, they may be eligible for ERTC provided that their gross receipts decline by more than 20%. The decline calculation is based on the employer’s relative performance during prior quarters in 2020 compared to the same quarter in 2019.
Eligible employers must reduce employee working hours or wages by at least 50% due to one of the two qualifying circumstances listed above unless they employ fewer than 100 full-time employees and can document that they did not reduce their workforce as part of cost-cutting measures relating to COVID-19 and can demonstrate a decline in gross receipts as discussed herein above.
Employers are eligible to claim Employee Retention Tax Credit (ERTC) if they have an eligible business, meet the criteria for full or partial suspension of operations due to COVID-19, and employ qualifying employees. Employers with more than 100 full-time employees in 2019 and employers with no more than 500 full-time employees can use Employee Retention Tax Credit for all their qualified wages for the quarter. Eligible wages are limited to $10,000 per employee and are calculated on a quarterly basis.
To qualify as a “qualified employee,” the individual must:
- Be employed by the employer at any point during the calendar quarter;
- Have had wages (for which Social Security taxes were withheld) of less than $10,000 in a quarter;
- Be employed by taxpayers who experienced either complete or partial suspension of operations due to governmental orders limiting commerce, travel, or group meetings due to COVID-19; or
- Be employed by taxpayers experiencing significant reductions in gross receipts during specified quarters compared to similar quarters in 2019.
Eligible wages also cannot include any income from family members of the employer.
Benefits of ERTC
The Employee Retention Tax Credit (ERTC) is a tax credit that helps businesses offset the costs associated with hiring and retaining employees. It was introduced in 2020 as part of the CARES Act. This tax credit is available to any business that was financially impacted by the COVID-19 pandemic.
This section will go into detail about the benefits that businesses can gain from taking advantage of this tax credit.
Tax credit amount
The Employee Retention Credit (ERTC) is a dollar-for-dollar equivalent reduction to the employer portion of Social Security taxes provided as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is available for businesses that were otherwise financially successful prior to the pandemic, but have been adversely affected.
The amount of tax credit for employers eligible for ERTC depends upon their total number of full-time employees. Generally, employers with fewer than 100 full-time employees can claim a tax credit equal to 50 percent of qualified wages up to $10,000 in wages per employee for 2020. Those with more than 100 full-time employees can claim only a 40 percent tax credit on qualified wages up to $6,000 per employee. There are additional rules and restrictions that must be met in order to qualify for this tax break.
The Employee Retention Tax Credit (ERTC) provides businesses affected by the COVID-19 pandemic with an immediately available tax credit of up to $7,000 per employee as compensation for wages paid that may otherwise have been furloughed. This credit incentive is designed to help employers retain their workforce and incur fewer losses associated with the outbreak.
Under ERTC, a business may be eligible for maximum credits of up to $5,000 per employee (up to $25,000 aggregate) if the business was partially or fully suspended due to coronavirus-related government orders or experienced a 50% reduction in gross receipts compared to the same quarter in 2019. An additional maximum credit of up to $2,400 per employee (up to $14,000 aggregate) is also applicable if wages are paid between January 1 and June 30, 2021.
In order to qualify for ERTC, businesses must meet certain criteria including:
- Having retained their employees during the disruption caused by COVID-19.
- Meeting certain wage requirements established by the IRS code. The number of wage payments necessary may vary depending on business size; consult with a CPA regarding this qualification before claiming ERTC on taxes.
- Businesses should also note that wages paid above and beyond any ERTC received cannot be claimed under ERTC thus reducing any income tax liability on those payments made throughout the year.
Payment of credit
The Employee Retention Tax Credit (ERTC) provides a dollar-for-dollar reduction of an employer’s tax liability for a portion of wages paid to eligible employees for the period between March 12, 2020, and December 31, 2020. Eligible employers may claim up to $5,000 per employee in ERTC payments. Any amount received as ERTC payments is refundable to the taxpayer as a refund or reduction of taxes due.
The IRS will pay the credit directly to the eligible employer. An eligible employer may choose to receive payment through direct deposit by providing banking information on Form 8452, Application for Payment of Qualified Tax Credit under section 51(d). The direct deposit can be elected and filed with the IRS any time after March 1, 2021, but before January 1, 2023.
Payment of credit is based upon an employer’s best estimate during each calendar quarter by submitting Form 941-X Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund on behalf of all affected employees in order to reduce their payroll taxes at the time that quarterly returns are due. The amount of credit for which employers can claim will vary depending on several factors including wages paid during a particular quarter and the number of employees. Employers who anticipate claiming ERTC payments should confirm with their tax advisors about filing deadlines and other requirements associated with requesting payment from the IRS.
If you are eligible for the Employee Retention Tax Credit, you’ll need to file for it with the IRS. This involves filing Form 941, Employer’s Quarterly Federal Tax Return, and Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. Additionally, employers must also file IRS form 7200, Advance Payment of Employer Credits Due To COVID-19.
To help employers understand the filing requirements, this section will go into detail:
Forms to be filed
Filing for Employee Retention Tax Credit (ERTC) requires business owners to prepare and submit the relevant forms. The Internal Revenue Service has established specific forms for small businesses to follow in order to apply for ERTC.
The form you will need to file will depend on your type of business entity. The Forms respectively associated with Employee Retention Tax Credit are as follows:
- Form 941, Employer’s QUARTERLY Federal Tax Return: This form is used by businesses that are structured as sole proprietors, an S corporation, or a partnership. This form is used by employers who need to report wages paid, federal income tax withheld, and other employment-related taxes on a quarterly basis.
- Form 8991, Business Credits: This form should be used by companies that have $20 million or less in total annual gross receipts for the 2019 and 2020 period who are claiming the Employee Retention Credit (ERC). It is also important to note that if either the Gross Receipt Test or Wages Paid Test has been met when filing amount of credit claimed cannot exceed $5,000 per employee per calendar quarter.
- Form 1045 Suspensions of Tax Liability: This Form should be used by taxpayers who want to receive an advance payment of Employee Retention Credits before they file their return or by those affected organizations who cannot pay or can only partially pay their Federal Income Taxes having liabilities less than the ERCs claimed through Form 8991.
By ensuring that the correct documents and forms are submitted in a timely manner, businesses can get access to the Employee Retention Tax Credit (ERTC), which can be beneficial during this period of the economic crisis caused due to coronavirus pandemic.
Documentation to be submitted
In order to claim the Employee Retention Tax Credit (ERTC), employers need to provide certain documents along with their filing. Employers must submit all applicable documents, including but not limited to the following:
- Certified payroll report by a CPA, including wages paid and hours, worked for each employee;
- Payroll tax filings reported to the IRS (including Form 941);
- Copy of any wage statements related to eligible wages paid;
- State quarterly wage unemployment insurance filings; and
- A letter or affidavit from a qualified healthcare provider certifying an applicable COVID-19-related employee illness in order for the business or tax-exempt organization to treat those employees as having experienced an “FTE decline.”
It is important to note that the documentation must support both eligibility requirements and the calculation of credit due. Supporting documentation must be maintained by employers for four years from the date of filing returns claiming ERTC credits. It is advisable for employers to document all costs associated with staffing reduction decisions due to COVID as well as other disasters, otherwise, they may lose out on this valuable tax credit that is available through 2021.
Deadlines to be met
When you are claiming the Employee Retention Tax Credit (ERTC), there are some important deadlines that must be met in order to be eligible for the credit.
The IRS has defined that the deadline for claiming the ERTC is December 31, 2021. You can claim a credit equal to 50% of qualified wages paid to employees up to $10,000 per employee ($5,000 maximum credit per employee). The ERTC includes qualified health plan expenses allocated to wages as set forth in section 45S of the Internal Revenue Code.
You are eligible to use the credit against 2020 employment taxes, as well as before filing your fourth quarter 2020 Form 941 (Employer’s Quarterly Federal Tax Return). Also, any ERTC amount can then be claimed on your annual federal income tax return. If you have overpaid employment taxes during 2020, it is possible to receive a refund of the excess amount even if filed later than December 31 due to administrative processes or an extension of time provided by an IRS authority.
Your payroll provider may be able to help with any questions you have about filing requirements for the Employee Retention Tax Credit and other payroll details related to qualifying wages and expenses. It’s also recommended that you get advice from a tax professional or accountant about how best to optimize your ERTC filing process and reporting forms before submitting documents related to taxes or credits.
With the passing of the American Rescue Plan Act (ARPA), employers in the United States are now eligible to claim the Employee Retention Tax Credit (ERTC). This tax credit was designed to give businesses a financial incentive to keep their employees employed while they navigate through the economic fallout of the pandemic.
For employers looking to understand more about the ERTC, there are several resources available. This heading will explore some of these resources in detail:
For more information on the Employee Retention Tax Credit (ERTC), it is important to visit official government websites. These websites can provide detailed and up-to-date information such as acceptable eligibility criteria, calculation methods, application filing requirements, and other related topics.
The Internal Revenue Service (IRS) is a good start for exploring ERTC guidelines as they contain the latest federal rules and regulations concerning this credit. The IRS website also provides tools to help employers determine if they qualify for the credit. Other websites such as the United States Department of Labor provide additional legal resources including articles and fact sheets that are helpful in understanding employee benefits associated with the ERTC.
State governments often have websites that could offer additional targeted information on local rules and regulations regarding employee retention policies. It is important to review programs offered by each state prior to making decisions on which program may be best suited for individuals or businesses eligible for these tax credits.
Finally, there are extensive online resources available from groups such as Certified Public Attorneys (CPAs), accountants, financial advisors, human resource consultants, business development experts, and others that focus on employee benefits planning. These third-party organizations can provide valuable insight into ERTC programs across all states and how to take full advantage of credits being offered through employers’ benefit plans.
Tax professionals are qualified to assist businesses and their owners with understanding and applying for the Employee Retention Tax Credit. Tax professionals can also guide businesses in how to navigate the rules and regulations of this benefit as they change over time. Furthermore, they can help businesses structure their payments so that they receive maximum benefits from the credit, while at the same time ensuring compliance with IRS guidelines.
If you decide to work with a tax professional for assistance, be sure to confirm that they have experience or expertise related to the Employee Retention Tax Credit. This will ensure that you receive accurate advice on your particular situation. Additionally, working with a dedicated professional provides an extra layer of protection in case of an audit, since their counsel and assistance will be documented in detail.
When considering working with a tax professional for your ERTC needs, or for additional questions or concerns about this credit, be sure to contact knowledgeable experts within your state such as Certified Public Accountants (CPAs) or enrolled agents licensed by the IRS before making any decisions.
If you are interested in learning more about the Employee Retention Tax Credit (ERTC), there are a variety of financial advisors who specialize in this particular area. They can provide advice tailored to your individual needs and help ensure that you are getting the most out of the credit.
Financial advisors can assist in determining eligibility, calculating the amount available, filing for the credit, understanding other requirements, and ultimately receiving a refund. Financial advisors also may be able to recommend other tax strategies that may further benefit people claiming this credit.
To find a qualified financial advisor, search online for local businesses or services recommended by friends and family.