The Employee Retention Tax Credit (ERTC), created by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), provides businesses with financial assistance to help retain employees by providing a tax credit equal to 50 percent of up to $10,000 in wages per employee. An eligible employer may receive credits of up to $5,000 per employee for qualified wages paid between March 13th, 2020 and December 31st, 2020.
The goal of the ERTC is to support employers who maintained their payroll during economic hardships due to the COVID-19 pandemic and help them retain or continue paying their employees in difficult times. Eligible employers may use the ERTC program to reduce or receive repayment for payroll taxes already paid during that period. Self-employed individuals may also claim a new credit based on their net earnings from self-employment.
Businesses should carefully evaluate their eligibility requirements under the program before applying for and claiming the credits. The following guidelines provide an overview of qualifications required to be eligible for this important program and define how credits can be claimed and applied:
- Eligibility requirements
- How credits are claimed
- How credits are applied
Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit was created in the CARES Act in response to the economic downturn due to the COVID-19 pandemic. It is available to employers who have been significantly impacted by the pandemic and are struggling to retain their employees.
This article will provide a comprehensive overview of the Employee Retention Tax Credit and help employers determine if they qualify for it.
The Employer Retention Tax Credit (ERTC) was included in the Coronavirus Aid, Relief and Economic Security (CARES) Act to help employers keep employees on their payrolls while they transition due to the COVID-19 pandemic. This tax credit can provide businesses with temporary liquidity and stability to retain their existing workforce during this time of economic stress.
To be eligible for the ERTC, employers must meet the following criteria:
- The business must have been in operation since March 13, 2020;
- The employer’s annual gross receipts are less than $1 million for 2019; OR
- The gross receipts for 2020 must show a significant decline relative to those of 2019 as compared quarter by quarter. Businesses will also need to provide documentation demonstrating that gross receipts decreased by more than 50% between comparable quarters in 2019 and 2020; AND
- Businesses must have retained their employees from March 13, 2020 through December 31, 2020. For an employer who has less than 100 full-time employees during the period ending June 30, 2021, all employees are considered retained if they were employed on any day during March 13 – June 30th (regardless of whether or not they were post or pre COVID); OR
- For an employer who has more than 100 full time employees during such period, only those employees are considered retained that were employed on any day during this same period of time AND who performed some hours of service for such employer during such period.
Maximum Credit Amount
The maximum credit amount is based on the number of full-time employees employed by the business during 2020 or 2021. For businesses with more than 100 full-time employees, the maximum credit is 70% of qualified wages up to an annual limit of $10,000 per employee.
For business that employed between 10 and 100 full-time employees in 2020 or 2021, the limit is 80% of qualified wages up to an annual limit of $7,000 per employee. Furthermore, employers who do not employ more than 10 full-time equivalent employees (FTEs) in 2020 or 2021 are eligible for a tax credit equal to 70 percent of qualified wages up to a limit of $10,000 per employee per year and no more than $50,000 total for all employees combined. Qualified wages must be reported on Form 941 for each quarter and self-reported on Form 941 as part of Schedule A.
No payroll taxes will be paid on these qualified wages which generate the tax credit except FICA taxes withheld from worker’s paychecks including social security and medicare taxes. Employers may be eligible for tax credits in addition to their regular wage withholding requirements based upon their ownership structures such as S corporations or partnerships. Refer to IRS Publication 535 for complete information regarding the Employee Retention Tax Credit eligibility requirements.
How to Claim the Credit
The Employee Retention Tax Credit (ERTC) is a valuable tax benefit designed to help businesses keep workers on the payroll and avoid layoffs. The credit was made available in late December as part of the Consolidated Appropriations Act, 2021.
Eligible employers can begin to claim the ERTC on their income tax returns filed for any taxable quarter in which they meet the qualifications set forth in the law. To claim the credit, employers must retain their employees and pay them wages during or after the applicable quarter to qualify. Qualified wages must be reported on Form 941, Employer’s Quarterly Federal Tax Return or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employers.
In order to receive this credit, employers must first determine if they meet any of following requirements:
- Qualifying employer
- Business that ceased operations due to coronavirus
- Gross receipts has declined more than 20%
- Exemptions from meeting requirements due to small business
All qualified businesses may receive a refundable tax credit of up to $5,000 per employee per quarter from March 2020 through December 2021. The maximum amount of qualifying wages included in each period is $10,000 for all taxpayers for all quarters combined (which equates to an $8K/$2K formula). This means that you may be able to claim up $28,000 per employee over the course of one year! Note that you are able only take advantage of either this relief measure OR Paycheck Protection Program loans but not both for the same period for a given employee.
Additionally, since this is a refundable tax credit program, even if you don’t have enough taxes owed after applying deductions and credits (meaning you already have no “tax liability” due), businesses could still get an IRS check back by claiming this credit! Those interested should consult with their CPA or accountant regarding eligibility questions and filing details related joining this program.
Other Important Information
The Employee Retention Tax Credit is a refundable tax credit against applicable employment taxes for businesses affected by COVID-19. This includes businesses which are fully or partially suspended due to the government’s stay-at-home orders, and those experiencing a significant decline in gross receipts compared to the same quarter in 2019. Employers must still meet certain wage and other requirements in order to qualify for this credit.
The Employee Retention Tax Credit was created under the CARES Act of 2020 to support businesses affected by the pandemic and its related economic impacts, by allowing them access to their own hard-earned money in the form of a tax refund. It is important to note that the resulting tax liability is set off against any applicable wages already paid out during 2020, reducing your total net tax liability.
Federal payroll (Form 941), unemployment insurance (Form 940) and estimated taxes are all covered under the credit, meaning employers can receive refunds on both payroll and unemployment costs as a result of this program. The amount of allowable credits generally depends on employee retention levels and gross receipts thresholds; however, additional regulations exist so it is recommended that employers consult with an accountant or their business advisor for specific information about their situation.
Other important information includes:
- Employers are eligible for credits if they had an average number of full time employees (FTE) between March 13th – December 31st 2020 that is less than or equal to 2019 levels during a relevant quarterly period.
- For employers with 100 full time employees or less in 2019, all wages (including health care costs) paid up $10,000 per employee are qualified for credits.
- For employers with over 100 employees in 2019, only wages paid when business was fully or partially closed due to COVID restrictions are qualified.
- Businesses must have experienced at least 20% decline Quarter over Quarter Gross Receipts compared with same period in 2019.
Qualifying for the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a federal tax credit available to employers as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act. It aims to help employer keep their employees during the Covid-19 pandemic.
In order to qualify for the ERTC, employers must meet certain criteria. Let’s take a look at the criteria for qualification:
- Criteria 1
- Criteria 2
- Criteria 3
- Criteria 4
- Criteria 5
Employers Eligible for the Credit
The federal employee retention tax credit (ERTC) allows employers to receive a refundable tax credit of up to $5,000 per employee for wages paid after March 12, 2020, as compensation for employees who have continued to provide services during the coronavirus pandemic. To qualify for the credit, employers must satisfy certain requirements.
Qualifying employers are typically those that are either partially or fully suspended by governmental orders due to the COVID-19 crisis, or if their business experienced a substantial decline in gross receipts over any quarter of 2020 relative to 2019. In order for an employer’s quarter-over-quarter 2021 gross receipts to be compared against their 2019 figures, they must be operating at full capacity prior January 1 of 2021.
To qualify for partial wages credit based on increments of 20 percent declines in gross receipts over a given quarter compared with 2019 figures, an employer’s gross receipts must:
- Not exceed $1 million in any calendar quarter;
- Have no greater than 500 full-time employees; and
- Have either partially or fully suspended operations during any calendar quarter in 2020 due to governmental orders related to the COVID pandemic; or have experienced a significant decline in gross receipts over any given quarter compared with 2019 figures.
Employers who acquired another business entity between calendar quarters will be required to report their aggregate employee count and total wages when determining eligibility. Employers who have received Paycheck Protection Program (PPP) loans can still qualify but are subject to additional criteria as outlined by the United States Department of Treasury website.
Employees Eligible for the Credit
The Coronavirus Aid, Relief, and Economic Security (CARES) Act established the Employee Retention Tax Credit (ERTC) to encourage businesses to keep employees on their payroll during closures or reductions of operations due to COVID-19. All employers that pay qualified wages are eligible for this new employer-side tax break.
Eligible employees are limited to those who meet the following criteria:
- Employees for whom employers paid qualified wages after March 12, 2020, until September 2022. Qualified wages must be for services performed by the employee during any period of economic hardship due to COVID-19.
- Full-time and part-time employees; however, employees who earn more than $100,000 in gross wages per year are ineligible for the credit.
- Employees whose hours have been reduced due to significant decline in gross receipts experienced by their employer as a result of the coronavirus crisis. A significant decline in gross receipts is defined as at least a 50 percent reduction in average quarterly receipt totals between 2019 and 2020 or 1st quarter 2020 compared with same quarter of prior year or 1st quarter 2021 compared with preceding 1st quarter 2021 (not yet applicable).
Employers may only count such qualified wages when attempting to calculate their ERTC eligiblity and should take care not to double count any qualifying expenses when determining other available credits due under the CARES Act. Employers should also review individual state rules related to employee eligibility requirements based on potential state specific relief programs already in place before submitting applications for assistance under the CARES Act.
Calculating the Credit Amount
Under the Employee Retention Tax Credit (ERTC), employers are eligible to receive a refundable federal tax credit of up to $5,000 per employee per quarter. The credit is equal to 70% of up to $10,000 in qualified wages paid or incurred by employers to employees between March 12, 2020 and June 30, 2021.
The amount of the credit depends on employer size and the amount spent on qualified wages for that quarter—only wages paid can count for the purpose of determining this credit. The maximum aggregate amounts that employers can claim in each quarter are as follows:
- For employers with 500 or fewer full-time employees (including full-time equivalents) in 2019:
- Up to $7,000 per quarter for each employee for whom qualified wages were paid; and
- Up to a maximum aggregate credit amount equal to $50 million each quarter.
- For employers with more than 500 full-time employees (including full-time equivalents) in 2019:
- Up to $5,000 per quarter for each employee for whom qualified wages were paid; and
- Up to a maximum aggregate credit amount of an employer’s total number of full time employees (including full–time equivalents) multiplied by $7,000.
The credits are applied against an employer’s portion of Social Security taxes; any seized credits will be reimbursed if an eligible tax return has been received. Prior eligible expenses may be refunded if calculated without the tax benefit taken into account. Employers should ensure they are aware of all applicable IRS rules before attempting this calculation on their own as there might be other credits or deductions available that could affect their calculation.
In conclusion, if you are a business owner, please take the time to determine if you are eligible to receive the Employee Retention Tax Credit. Accessing this tax credit could mean significant savings for your business. Additionally, making sure you are meeting the requirements of the IRS to be eligible for claiming this credit can save your business from incurring additional costs or penalties associated with incorrectly filing taxes.
If after reading through the qualifications and guidelines outlined in this article, you determine that your business does qualify for the Employee Retention Tax Credit, we strongly encourage you to look into filing for it with the IRS. It can mean a large sum of money saved for your business and make it easier to weather these difficult times.