Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was established under the Coronavirus Aid, Relief, and Economic Security Act (CARES) as a way to help businesses that were struggling due to the pandemic. If your business qualifies, you can receive a refundable tax credit up to $5,000 per employee for keeping them employed.
Let’s take a closer look at the qualifications and other important details:
Definition of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a refundable tax credit established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The goal of the credit is to help businesses keep their employees or re-hire them after business operations were affected by COVID-19. The credit is available for wages paid from March 13th to December 31st, 2020.
The ERTC can cover up to 50% of eligible wages paid to employees, with a maximum credit amount per employee of $5,000.00 for applicable quarters. To be eligible, businesses must have experienced either:
- (1) business operations disruption due to governmental order related to COVID-19
- (2) at least a 20% reduction in gross receipts in the same quarter in 2020 compared to the same quarter in 2019.
Eligible wages include qualified health plan expenses and any amount that’s included in an employee’s federal gross taxable income.
Additionally, employers are also able to use their existing payroll solution or tax software with additional requirements placed on both solutions before they can be used as qualifying solutions for claiming the ERTC. Employers must review these requirements carefully before utilizing either solution when calculating their ERTC qualification and reporting requirements.
To be eligible to receive the Employee Retention Tax Credit under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a business must meet the following requirements:
- The business must have been in operation for at least one year prior to the date of enactment of the CARES Act.
- They must have experienced a full or partial closure due to a government order related to COVID-19, or have experienced a significant decline in revenue during the calendar year 2020 (a drop of 50% or more when compared to comparable quarters in 2019).
- Eligible employers cannot be listed on one of several excluded industries including agriculture and horticulture businesses, life insurance companies, some financial institutions, gambling establishments and non-profit organizations.
- The business must pass an income test which indicates that it has an exemption from employment taxes under Internal Revenue Code Section 3306(b)(7) because wages paid by another employer is taking into account. This can be found on Form 940.
- If the business was established after January 1, 2018 they may be eligible to receive Employment Retention Credits only if they are belonging to an eligible partnership that has been in existence since before February 15th 2020 or are included in a consolidated group filing their taxes as one taxpayer.
The employee retention tax credit (ERTC) is available to employers affected by the coronavirus pandemic. It is designed to help employers keep employees on their payrolls by providing a refundable tax credit for eligible employers. In order to qualify, employers must meet certain criteria, which can be complex.
In this article, we will look at how to calculate your eligibility for the ERTC:
Gross Receipts Test
In order to be eligible for the Employee Retention Tax Credit (ERTC), a business must first pass the gross receipts test. This means that their gross receipts for a given quarter in 2020 must be less than 80% of their gross receipts from the same quarter in 2019.
Other than comparing 2020 and 2019 quarters, there is an alternative way to calculate eligibility which is applicable to new businesses whose 2020 tax filing was after August 8, 2020. If this is the case, gross receipts must be compared to the same period in 2019 or 2018, whichever produces the highest percentage of decrease. To take advantage of this option, you will need to inform the IRS on your tax filing.
The 2021 provisions received under COVID-19 relief legislation also allow for potential modifications in some cases such as:
- if a business had a 25% year-over-year decrease in any quarter from July 1st – December 31st
- if they have already rehired workers and are still unable to get back to their pre-pandemic capacity due to continued pandemic restrictions.
In these instances, businesses can compare their total quarterly receipts for 2021 with their total quarterly receipts from Q2 of 2019 or Q4 of 2020 which ever provides the highest percentage drop in qualify for ERTC.
Partial Suspension of Operations Test
In order to be eligible for the Employee Retention Tax Credit (ERTC), businesses have to satisfy a partial suspension of operations test. This test requires that operations of the business be suspended or limited due to orders from an appropriate governmental authority that limit customers, suppliers or workforce from entering or working at the relevant place of business.
Businesses must also experience either:
- A “significant decline in gross receipts” when compared to corresponding numbers for the same quarter in the prior year, or
- Gross receipts being below 50% of their prior-year levels for each quarter or over any two consecutive calendar quarters within 2020.
Generally, this test is satisfied if on a weekly basis the gross receipts for one quarter of 2020 are less than 80% of gross receipts for comparable weeks in 2019, when both quarters involved are taken into account. For more clarity and detailed information on calculating eligibility related to this partial suspension of operations test, refer to Internal Revenue Service’s Frequently Asked Questions document.
Calculating the Credit
The Employee Retention Tax Credit is designed to incentivize businesses to keep employees on their payrolls during the coronavirus pandemic. In order to qualify for this credit, the business must meet certain criteria. Calculating the credit is an important step in determining whether or not you are eligible for this credit.
Let’s explore the criteria and how to calculate the credit:
Maximum Credit Amount
The maximum amount of credit that can be claimed depends on many factors, including your filing status, income level, and number of dependents. Generally speaking, the higher your adjusted gross income (AGI) is, the lower your maximum credit will be. However, credits increase for taxpayers with more than two dependents and decrease for those filing as “head of household.”
Income limits in 2020 for reference:
- Single: $75,000 AGI ($87,000 Married Filing Jointly)
- Head of Household: $112,500 AGI
- Married Filing Separately: $37,500 AGI
Once you’ve determined your filing status and income limit information from above you can calculate how much you are allowed to take. The formula differs slightly between long-term taxpayers who have been paying taxes consistently versus new taxpayers who may not have tax liability in prior years.
- For long-term taxpayers: Maximum Credit Amount = Income Level x Taxable Amount – Total Tax Paid
- For new taxpayers who may not have tax liability: Maximum Credit Amount = Income Level x 5% x Taxable Amount
In general, if the taxpayer’s earned income is below the income limit threshold listed above they will be entitled to receive this maximum credit amount when they file their taxes each year.
Credit calculation is an important part of the credit process and understanding how it works can help you get the best rate when you are looking for new credit. It is important to have a good credit score, as this can make a substantial difference in both the interest rates that lenders offer and the amount of borrowing power you have when applying for new credit.
Credit calculation is based on several factors, including:
- Payment history, which includes on-time payments as well as any late or missed payments in the past 6-12 months.
- Outstanding debt, which consists of how much money you still owe creditors.
- Account balance, which includes the outstanding balance on each account and its current limit.
- Length of credit history, which is determined by the average age of all open accounts listed in your report.
- Types of credit used, such as mortgages, auto loans or student loans.
- Recent inquiries, which are any recent requests made to banks and lenders.
- Available Credit, which takes into account both your current maximum limits on accounts and any other outstanding balances that may be included in your report but have not been used yet.
It’s important to remember that each creditor will calculate your score individually using their own criteria for scoring so it’s wise to know what factors might affect your overall score before applying for new accounts or requesting additional lines of credit. Knowing how this process works can help you avoid larger fees or higher interest rates due to unfavorable terms from creditors.
Credit limitations are established by creditors and credit card issuers to ensure that borrowers don’t overextend themselves. Each creditor is likely to have different policies and limits in place, but in general, all must adhere to basic regulations about how much risk it is willing to take on for unsecured debts like credit cards.
Limits can be based on a variety of criteria, including your income and employment history, existing debt-to-income ratio, and available collateral. Credit card utilization rate is an important part of this calculation; it refers to the percentage of available credit you use in relation to the total amount offered by creditors. Credit cards come with maximum limits, which affect borrowing potential – however, many lenders base your actual limit on your data points as well as their own risk assessment models.
Depending on your financial situation, a lender may opt for a lower initial limit when you open an account but will periodically consider raising it if you have demonstrated responsible borrowing practices over time. Taking the time to review your credit report regularly not only helps protect against identity theft but also ensures that you are aware of any changes –good or bad–that lenders make regarding the credit extended to you from their institution.
Filing for the Credit
The Employee Retention Tax Credit (ERTC) is a tax incentive from the Internal Revenue Service (IRS) designed to help businesses retain employees during the coronavirus (COVID-19) pandemic. If you’re an eligible employer, you can take advantage of ERTC by filing the appropriate forms with the IRS. This article will go through all the steps and details you need to know when filing for the ERTC:
Form 941, also known as the Employer’s Quarterly Federal Tax Return, is used to report for an employer’s income and employment taxes. This form is filed with the Internal Revenue Service (IRS) on a quarterly basis. It is required for any business with employees and it includes employer-paid taxes such as social security, Medicare, federal income taxes, and other liabilities such as state unemployment compensation and other contributions or deposits made for state disability insurance or family leave.
The amounts reported on Form 941 should be consistent with the amount of wages paid to your employees during each quarter. If filing online, you will need to use an Electronic Federal Tax Payment System (EFTPS). Alternatively, you can send form 941 along with a check payable to “United States Treasury” to the IRS address printed on the form.
Be sure to keep copies of your Form 941 reports in case of any possible audits by the Internal Revenue Service (IRS). It is important that all information provided on this form be accurate and up-to-date in order for you to receive your tax credits promptly and avoid penalties and interest charges.
The main credit form you need to fill out when applying for the Employee Retention Tax Credit (ERTC) is form 5884. This is a very simple and brief document with just 11 steps to complete, including the calculation of the credit itself.
On this form you’ll need to provide basic information about your organization, including its name, tax year, and address. You’ll also need to enter information about wages paid during the period of eligible employment (defined later in this article). Finally, you’ll use Line 11 of Form 5884-A or Line 8 of Form 5884-B to calculate your final ERC credit amount.
When filing Form 5884, it is important that you carefully read and understand all related instructions from The Internal Revenue Services so that you are following all applicable laws and regulations correctly. Additionally, any records or supporting documents related to ERTC should be kept for future reference in case of an audit by the IRS. Following these steps can help ensure that your organization successfully applies for and receives any applicable ERC credits.
Whether or not you qualify for the Employee Retention Tax Credit (ERTC), there are other resources that can help you keep your business up and running during the COVID-19 pandemic. This section will provide additional resources that you should be aware of to help you successfully navigate the current climate.
IRS Publication 5137
The Internal Revenue Service (IRS) regularly updates their publications to provide concise information on various topics concerning tax law. Among these is Publication 5137, which covers the Employee Retention Tax Credit. This publication provides an overview of the Employee Retention Tax Credit, outlining its purpose and who might qualify for it. It also provides information related to claiming the credit, such as:
- Filing instructions
- How to figure out how much credit you may be eligible for
- How to make sure your employees are accurately classified as full-time or part-time eligible employees
Additionally, this IRS report outlines other steps businesses can take to ensure that they are properly taking advantage of the ERC’s benefits. For more in-depth guidance on this topic, readers can refer to IRS Publication 5137 or speak with a Certified Public Accountant (CPA).
IRS Form 5884 Instructions
IRS Form 5884 is the Work Opportunity Tax Credit (WOTC) form used to determine whether or not a business can claim a federal tax credit on its taxes for retaining certain types of employees. If a business meets the criteria, it may be eligible to receive up to $2,400 of WOTC credits per eligible new hire each year. The form must be filed by the employer’s end of year deadline, which can be found on IRS Form 941 (Employer’s Quarterly Federal Tax Return).
When filing IRS Form 5884, an employer must provide detailed information regarding its eligible employees and their start dates. The following information is required:
- Employee name
- Social Security Number
- Start date
- Total wages
- Number of hours worked
- Address where work was performed
- Occupation or job title held by the employee at the time s/he was hired.
The instructions for this form explain in detail how to complete it and claim the WOTC tax credit. Also included are resources employers can use to determine if they qualify for this credit. Additionally, these instructions discuss the various types of credits available and how they vary by industry.