Overview of Employee Retention Credit
The Employee Retention Credit (ERC) is a federal tax credit that employers can use to help cover their payroll costs and keep their employees on the payroll during the COVID-19 pandemic. The ERC can help employers offset the costs of wages that the employer paid for employees and can also be used to help reduce an employer’s federal tax liability.
Let’s take a look at the details of the ERC and how it can be used on tax returns:
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a tax incentive provided by the federal government intended to encourage businesses to keep their employees on payroll by providing financial assistance. The credit is equal to a percentage of wages paid which can be claimed against certain employment taxes.
The goal of the ERC is to incentivize employers who have been affected by the COVID-19 pandemic, while at the same time encouraging them to keep their workforce employed. It also provides an incentive for small businesses and nonprofits to avoid layoffs due to the pandemic’s economic impact.
In order for employers to qualify for this credit, they must meet certain criteria including:
- annual gross receipts that decreased more than 50% compared to 2019;
- experiences operations fully or partially suspended during 2020 due to governmental orders related to the COVID-19 health crisis; or
- makes up 20% or more drop in quarterly receipts from 2019 over any quarter in 2020.
In addition, employers must have 500 or fewer full-time employees in order for wages paid after March 12th, 2020 and before January 1st, 2021 be eligible for the credit along with all health plan expenses paid over this period as well.
Businesses that receive a Paycheck Protection Program (PPP) loan are generally not able to claim ERC due to overlapping legislation however there are some exceptions that may apply. Businesses should review their particular situation carefully and talk with their tax advisors about potential eligibility and timing if they believe they may be able qualify for both programs during different periods within each defined timeline.
Who is eligible for the Employee Retention Credit?
Businesses that have suffered economic hardship due to the coronavirus (COVID-19) pandemic may be eligible to claim the Employee Retention Credit (ERC). The ERC is a refundable tax credit equal to 50% of qualified wages up to $10,000 per employee. Qualified wages generally include wages paid after March 12, 2020 and before January 1, 2021.
The credit is available for employers whose operations were fully or partially suspended as a result of an order from an appropriate governmental authority related to COVID-19. The ERC is also available for employers whose gross receipts declined by more than 50% relative to the same calendar quarter in 2019 – regardless of whether operations were suspended.
The eligibility rules vary depending on employer size and whether or not the employer receives funding from other government assistance programs designed to help businesses during the crisis. If your business has fewer than 100 full-time employees in 2020, you are eligible if either of the following applies:
- You had some portion of your operations suspended due to orders from an appropriate governmental agency related to COVID-19
- Your gross receipts declined by more than 50% compared with the same calendar quarter in 2019
If your business had more than 100 full-time employees in 2020, you are eligible if either of the following applies:
- You experienced a full or partial suspension of operations due to orders from an appropriate governmental agency related to COVID-19;
- Your gross receipts declined by more than 50% compared with one prior year’s calendar quarter.
How to Calculate the Credit
The Employee Retention Credit (ERC) is a refundable credit available for certain businesses affected by the Coronavirus pandemic. It is designed to provide a financial boost to help businesses keep employees on payroll.
Determining how much credit you can claim can be complicated, but the basic formula is relatively straightforward. In this section, we will look at how to calculate the Employee Retention Credit.
Calculate the eligible wages
The Employee Retention Tax Credit (ERC) is a fully refundable credit for employers affected by COVID-19. The ERC aims to assist employers in continuing to pay wages to their employees when their business has been affected by the pandemic. To calculate your eligible wages for the credit, add up wages you paid in 2020 and 2021 that qualify. Eligible wages must meet five criteria:
- The employer must be an “eligible employer” as defined by IRS criteria.
- The employee must have been employed by the eligible employer on March 12, 2020
- Wages paid between March 13, 2020 and December 31, 2021 qualify for the credit
- Qualifying wages are limited to $10,000 per employee per year
- Qualifying wages include amounts paid for vacation, parental, family leave or leave pursuant to federal or state laws related to COVID-19
After you have calculated your eligible amount of qualifying wages per employee, you can then use this amount as part of your claim for the Employee Retention Tax Credit on your tax return. To make sure you are maximizing your ERC claim, consult a tax advisor or accountant who can help make sure that all applicable rules and regulations are met when filing with the IRS.
Calculate the credit amount
Employers are eligible to claim a credit against the employer share of Social Security taxes they must pay, up to a certain amount, if they have not been able to fully or partially operate due to orders from a governmental authority related to COVID-19. To calculate your Credit amount, follow these steps:
- Calculate the number of employees you kept on payroll in each of the quarters for which you are entitled to receive credits. The number of employees is calculated using a payroll period that includes at least one or more days for your respective quarter in which the business was closed or partially suspended due to COVID-19 related reasons.
- Multiply the number of employees retained during each quarter by $5,000 and add it together for all four quarters. This is your potential maximum credit allowed based on the total number of employees you had on your payroll during these times.
- Compare this maximum amount versus specific wages you paid out during each quarter included in this formula: The lesser of 50 percent of wages paid (including qualified health plan expenses) or $10,000 per employee per eligible quarter capped at these respective totals below:
- Q1 2020 =$15k max credit
- Q2 2020 = $20k max credit
- Q3 2020 =$25k max credit
- Q4 2020 =$25k max credit
- Finally, compare the total potential maximum allowable by law versus wages you have already paid overall in any given quarter including health plan contributions and subtract final number from those wages already paid equalizing an exact credit amount that can be applied against FICA taxes payable next year until exhausted dollars provided under this act expire (December 31 2021).
Calculate the maximum credit amount
When calculating the maximum credit amount, employers must consider their qualified wages and the number of employees they had in 2020 or 2019. The general formula for determining the maximum credit an employer can claim is:
[(Qualified Wages Paid in 2020 X 50%) + (Qualified Wages Paid in 2019 X 25%)] X Number of Employees = Maximum Credit Amount
In addition, employers must take into account several factors around their qualified wages. These include:
- How much was spent on wages over $10,000 per employee between March 12 and December 31.
- How much employees were paid during furloughs.
- How much was spent on health insurance premiums.
- How many paid leave days were used by employees.
It’s important to note that this calculation is always based on the amount actually paid out in qualified wages—not just wages earned by employees or eligible medical benefits furnished to them.
Claiming the Credit on Your Tax Return
Claiming the Employee Retention Credit (ERC) on your tax return can help you recoup the costs of maintaining your workforce during the coronavirus pandemic. This article will dive in and discuss the steps to take in order to successfully claim the credit on your tax return.
We’ll cover all the details, from eligibility requirements to filing the form:
How to claim the credit
The Employee Retention Credit is a refundable credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. The amount of qualified wages taken into account with respect to each employee for all calendar quarters is limited to $10,000 ($5,000 for the period beginning on December 31, 2020).
To claim the Employee Retention Credit employers must file a separate Form 941 for each quarter in which it wishes to claim the credit. If an employer’s payroll tax payments for any quarter are more than the tax reported on Form 941 as due (after taking into account other applicable credits), a refund or an offset of other liabilities can be claimed by filing Form 941-X. Claims for refunds or credits should be filed as soon as possible so that employers can receive their refund or credit without delay.
For complete eligibility requirements and more information about claiming the credit on your tax return please consult IRS Publication 535 and any applicable state guidance related to applying this federal credit at the state level.
What forms are needed to claim the credit?
When filing your taxes, you need to provide certain forms and documentation in order to claim the employee retention credit. Depending on your specific situation, the forms may vary but generally include:
- Form 941: Employer’s Quarterly Federal Tax Return. This form is required for employers who use the calendar year as their tax year and report wages, taxes and adjustments due on a quarterly basis.
- Form 1099-MISC: Miscellaneous Income. This form is required if you’re an independent contractor or self-employed individual with nonemployee compensation income of $600 or more during a single tax year.
- Forms W-2 and 945: These forms detail wages paid by employers to employees who are employed at least 20 hours a week (or less under certain conditions). Form 945 is used if you’re paying federal income tax on withheld income taxes from employees with wages that were subject to Social Security and Medicare taxes during the previous calendar year, while form W-2 is used if all such wages were subject to Social Security and Medicare taxes.
In addition to these IRS forms, employers must also have adequate documentation from each quarter of employment, including records of pay dates, payroll payments and gross receipts for each eligible employee claiming the credit that are subject to withholding for federal income tax purposes.
How to report the credit
If you are eligible for the Employee Retention Credit, you may claim it when filing your quarterly employment tax returns. You may need to adjust your estimated taxes, or have an additional amount of wages withheld from employees’ paychecks if you are claiming the credit. The amount of the credit must then be reported in the “employer’s other income” section of Form 941/944 and on a line labeled as “Employee Retention Credit.”
When filing your end-of-year income tax return, you will need to report the total amount of credits taken on the Forms 941 filed throughout the year on line 15b of Form 940 or line 16b of Form 944. Those employers with refundable credits will receive a refund if they file their return via EFTPS® or electronically through a third-party provider approved by IRS. Employers who have paid all their employment taxes for that quarter should also include payment along with their quarterly return when submitting to IRS.
For further information about claiming and reporting this credit, please refer to IRS guidance available at http://www.irs.gov or consult qualified tax professionals for assistance in filing your returns correctly.
Tips for Claiming the Credit
The employee retention credit is a valuable benefit available to businesses, but there are important things to know in order to be able to claim it on a tax return. This section will provide tips on how to make sure you are eligible for the credit and the most effective way to claim it.
We’ll go over the requirements and the paperwork needed to be able to take advantage of the credit.
Maintain accurate records
In order to claim the Employee Retention Credit on your tax return, it’s important to maintain and produce accurate records. Your records should include documents such as payroll tax forms, employee pay information, and other information which can support that you have met the requirements of the credit.
Additionally, it’s important to keep copies of all documentation used to make claims. This includes any statements or declarations issued in connection with the credit. The IRS might not allow your claim unless you are able to provide this documentation and may even disallow your credit if you cannot demonstrate that you meet the eligibility criteria or have provided accurate information on your application.
Finally, when claiming the Employee Retention Credit, consider speaking to a professional accountant or tax advisor for guidance on how best to complete your application and maximize any benefit available.
Stay up to date on changes
Staying up to date on changes to the Employee Retention Credit (ERC) is essential for eligibility. This credit is available for businesses that have been affected by COVID and has gone through various changes over the course of the pandemic. It’s important to be aware of any updates or new information regarding this credit as it can affect your eligibility or benefit from claiming it.
The ERC has been extended twice, with additional expenses and disruptions now qualifying for refunds. Additionally, employers are eligible to receive credits on wages paid between Jan 1, 2021 and June 30, 2021. The IRS also transitioned in March 2021 from the traditional system of applying for an advance refund based on estimated credit calculations to allowing employers to claim a refundable tax credit when filing quarterly and annual employment tax returns (941). Be sure to check that your business meets all criteria under the new law before filing your return.
It’s also important to check back periodically as Congress continues to consider extending or changing ERC requirements in response to changing economic conditions due to COVID-19. While many states have followed suit with their own versions of this program, it’s important that you follow federal guidelines as they are subject to change for refinements before making any claims for yourself or your business.
Seek professional advice
When dealing with the complexities of the Employee Retention Credit, it’s best to seek professional advice. A qualified Enrolled Agent (EA) or CPA can help you calculate your credit and make sure you get the maximum amount possible.
Another key advantage of seeking professional advice is that an EA or CPA can represent you if the IRS has any questions about your claim. The IRS pays careful attention to tax credits, so it’s important to ensure that all information is properly documented before submitting a claim. An experienced professional can help guide you through any potential issues.
Finally, experienced professionals can:
- Stay up-to-date on changes in legislation that may impact the credit calculation or program requirements and provide the most accurate advice available.
- Help protect your interests in case of an audit by providing additional documentation to support your claim.