Overview of Employee Retention Credit
The employee retention credit is a refundable tax credit available to employers, who are carrying on a trade or business and experiencing economic hardship due to COVID-19. The employee retention credit applies to wages paid to employees after March 12, 2020 and before Jan. 1, 2021.
In this article, we’ll discuss what you need to do in order to claim the employee retention credit and how you can amend your tax return to claim the credit:
What is the Employee Retention Credit
The Employee Retention Credit (ERC) is a tax credit available to eligible employers that are faced with economic hardship due to the COVID-19 pandemic. Under the Coronavirus Aid, Relief and Economic Security Act (Section 2301 of Div. N) enacted on March 27th, 2020 and further modified on December 27, 2020, eligible employers are able to claim a refundable tax credit for up to 50 percent of qualified wages paid in calendar quarters of 2020 and 2021. The wages must have been paid after March 12, 2020 and before January 1, 2021. If a qualified employer pays qualified wages in 2021 but had not paid any in 2020 the credit may be applied retroactively starting on the date they begin paying qualified wages during 2021.
Generally, employers who had an average number of full-time employees over 2019 equal to 100 or fewer (including members of certain controlled groups) are eligible for a full credit based on their total qualified wages up to $10,000 per employee with no limit on the total amount of the credit taken. If an employer’s average number of full-time employees in 2019 exceeded 100 but was less than 500 (including members of certain controlled groups), Eligible Employers are limited by their actual qualified wages paid up to $4000 per employee with no limit on total amount of credit taken. Despite their size for ERC purposes if their operations were fully or partially suspended during any quarter because requirements established by governmental authorities due to Covid-19 or if gross receipts year over year have decreased at least 20%, they will be considered an Eligible Employer.
In addition, not all types of organizations can take advantage – Religious or governmental organizations are ineligible as well as foreign businesses without a US Trade or Business Determination from IRS; however there are some special rules for seasonal employers which could allow them access if slightly different than above criteria too so it is important that you visit IRS website and review prior filing guidelines going back to start calculating your eligibility properly.
Who is Eligible for the Employee Retention Credit
The Employee Retention Credit was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and is available to employers impacted by COVID-19. The purpose of this credit is to help incentivize employers with 500 or fewer full-time employees to retain the employees on their payroll during difficult economic circumstances.
Eligibility criteria for the Employee Retention Credit is as follows:
- Employers that are impacted by COVID-19 through either a full or partial governmental order suspending business operations must have an average of not more than 500 full-time employees in 2019.
- Eligible employers will be able to claim 50% of qualified wages up to $10,000 per employee for wages paid between March 12, 2020 and December 31, 2020 (for wages paid from January 1, 2021 through June 30, 2021 the credit amount is 70%; for wages paid from July 1, 2021 through December 31, 2021 the credit amount is 60%).
- Qualified Wages include wages paid after March 12th as well as group health care costs related to qualified wages for health plans for a period including at least any two consecutive calendar quarters after March 12th in 2019 or 2020.
- Additionally, any employer that has received a loan through the Small Business Administration (SBA) Paycheck Protection Program will not be eligible for the Employee Retention Credit unless they have opted out of PPP before May 2nd 2020 and all funds have been returned; Employers who defer paying their share of Social Security tax are also ineligible for this credit.
Employees meeting these criteria are eligible to receive the Employee Retention Credit when filing their taxes. Employers who wish to amend their taxes should refer to Form 941-X and carefully review all instructions before filing their amended return.
How Much is the Employee Retention Credit
The Employee Retention Credit is a fully refundable credit of up to $5000 per employee and $10000 per employer. The credit is based on the qualified wages each employee earned for working between March 13 and December 31, 2020. Qualified wages are the wages that are paid to an employee for the period when they are actively employed by the business, including vacation pay, holiday pay, and other payments to which federal payroll taxes apply.
The amount of the credit depends on how many employees you have, how much your average monthly payroll costs were prior to 2020, and whether you choose to have Paycheck Protection Program funds excluded from your eligible costs. Employers who had more than 100 employees at any time in 2019 can use wages that are paid after March 12, 2020 but before January 1, 2021 as part of their calculation for the Employee Retention Credit. For employers with fewer than 100 full-time equivalent (FTE) employees at any point in 2019, all wages paid between March 13 and December 31 are included in their calculation which can result in a larger total credit amount.
For businesses that participated in Paycheck Protection Program loans or relief payments via other legislation such as The Families First Coronavirus Response Act (FFCRA) will need to take special consideration so they don’t double dip or exceed the maximum allowable limits when it comes to calculating eligible costs for credits like ERC. The IRS’ latest guidance may require companies to amend prior tax returns if certain criteria has been met.
How to Claim the Employee Retention Credit
As part of the CARES Act, the Employee Retention Credit was created to help businesses keep their employees. This credit can be up to $5,000 per employee, which can provide much needed relief to businesses who are struggling due to the pandemic.
In order to claim the credit, however, businesses must amend their tax return. This article will discuss how to properly amend your tax return in order to claim the credit:
How to Calculate the Employee Retention Credit
Employers can determine the amount of their Employee Retention Credit on Form 941 quarterly. The maximum credit calculation is 50 percent of up to $10,000 in wages and health plan costs paid to eligible employees during a taxable quarter.
To calculate the total amount of an employer’s Employee Retention Credit for a given quarter, employers should use the following steps:
- Determine Eligible Wages: Identify those wages paid to each retained employee that qualify for the Employee Retention Credit. Eligible wages include compensation for services performed in a taxable quarter by an individual if their working hours were reduced due to COVID-19, qualify for paid sick leave or family medical leave in accordance with Emergency Paid Sick Leave and/or Emergency Family Medical Leave Acts, or are wages that otherwise do not qualify as qualified wages but are still treated as qualified wages solely for purposes of claiming the Employee Retention Credit from March 13-December 31, 2020.
- Calculate Wages Subject to Social Security Taxes: Employers must then determine which portion of eligible wages is subject to Social Security taxes in order to be subject to the credit limit based on 6.2% multiplied by $10,000 (the “6.2% Rule”). Generally speaking, most employers will include all eligible wages received by an employee when calculating their credit limit under the 6.2% Rule; however, there are some exceptions employers must keep in mind when determining which portion of eligible wages are actually Subject Wages under Sec 199A(a)(3).
- Determine Qualified Healthcare Costs: Total healthcare costs incurred during a taxable quarter which directly relate to healthcare coverage provided under a group health plan may also be included when calculating an employer’s Employee Retention Credit (“Qualified Healthcare Costs”). These Qualified Healthcare Costs are limited only by what is actually incurred during a given quarter and can consist of employer contributions made directly (e.g., health insurance premiums) or indirectly (e .g., amounts set aside as part of flexible spending accounts).
- Calculate Total Eligible Amounts: Employers should then add together all Eligible Wages and Qualified Healthcare Costs taken into account on Form 941 quarterly payroll tax returns by employees who further qualified for employee retention credit prior to December 31st 2020 & divide it by 2 – using this result within line 10b of IRS form 941 accordingly
- Calculate Credits Claimed on Form 941: After completing Steps 1-4 above , employers should then subtract any credits designated as “ERCs/ERTCs claimed elsewhere” as reported on line 10d from total credits claimed on line 10b of IRS form 941 within each applicable taxable quarter
- Figure Out Health FSA Reimbursements Excluded from Credits Claimed Elsewhere When reporting credits claimed elsewhere related specifically to qualified health Flexible Spending Arrangements Employers need factor those reimbursements amounts that fall within Line 23f & exclude them from ERCS/ERTCS reported elsewhere accordingly.
How to Claim the Employee Retention Credit on Your Tax Return
The Employee Retention Credit (ERC) is a credit available to employers to offset the cost of continuing to provide health care coverage for employees during the COVID-19 public health emergency. The ERC is calculated by multiplying the amount of wages paid for which the credit is calculated by a rate equal to 50 percent of the qualified wages.
Employers who are eligible for the ERC can take advantage of this credit when filing their income tax return. Here are some steps you should follow in order to claim your ERC on your applicable tax return:
- Determine eligibility: You must meet certain eligibility requirements in order to be able access this credit, as established by law. Check with your accountant or tax advisor to make sure you meet all eligibility criteria before proceeding with claiming this credit on your tax return.
- Calculate and Record Wages Paid: Employers must calculate their wage payment for full-time equivalent employees and document it in their records. This includes wages paid from March 12, 2020 through December 31, 2020, or later depending on when Congress decides on an ending date for this Credit period.
- Claim and Document the Credit: Once employers have determined that they are eligible and have calculated the relevant wages they can claim against the Credit rate of 50%, they may need to amend their current income tax returns in order to claim this available tax relief opportunity dependent upon how they originally filed it earlier in 2021 or even during 2020 if initial returns were prepared taking into account/consideration of these potential credits as ‘anticipated’ rather than claimed credits at year end/time close-of-businesses time frame related when doing their books/financials due diligence process activities for finality purposes prior year closes).
- Receive Payment: If a refund is expected from claiming the employee retention credit, employers should be sure that they indicate that preference when filing their applicable form(s). If a direct deposit was used when filing earlier this year–or possibly even last year–that same direct deposit numbers should be used again here–for purposes relative only where claiming credits such as these; all other banking information will remain unchanged, unless there has been any change since then through amendatory activity engaged in pursuant thereto.
What Forms Do You Need to Claim the Employee Retention Credit
To claim the Employee Retention Credit, eligible employers must fill out and submit the respective IRS form for their filing type according to IRS instructions. Employers filing an annual income tax return, must use Form 941-X and quarterly filers will need to use both Form 941 and Form 945-X, depending on their fiscal situation:
- Form 941 filers who have reduced wages or are not using paid leave in a given quarter can claim the credit on each regular (without payment deadline extension) quarterly employment tax return, without filing a request for an adjustment.
- Form 945 filers should take advantage of the special expedited process to make corrections to certain amounts reported on Forms 941. In that case they should use Form 945-X. Employer should make sure to include additional deductions and credits due, such as claiming the employee retention credit, on this form.
If employers have already filed for a given quarter but need to claim the employee retention credit retroactively, then they need to file an amended return. In such cases employers can file a separate amendment or combine it with other required changes made after initial filing by submitting Form 941-X with Part 2 completed.
It is important for employers to ensure that all forms are properly filled out before submission in order to take advantage of all relevant deductions and credits.
Amending Tax Return for Employee Retention Credit
If you have received the employee retention credit for 2020, you may need to amend your tax return. This credit was designed to help businesses struggling during the pandemic. It is a refundable credit for employers who keep their employees on the payroll.
Amending your tax return is necessary if you want to take advantage of this credit and get the full benefit. Let’s look at the details of amending your tax return for the employee retention credit:
When Should You Amend Your Tax Return for Employee Retention Credit
The goal of the Employee Retention Credit (ERC) is to provide businesses with a refundable payroll tax credit when they are experiencing economic hardship due to the COVID-19 pandemic. Employers may be able to use this credit to help them keep their employees on board and compensate them for any wage reductions they had to make. Depending on their situation, employers may have amended their 2020 tax return or claimed the employee retention credit in 2021.
If an employer amends their 2020 tax return for the ERC, they will need to make sure that any changes due to the ERC do not negatively affect other tax credits or deductions that were already claimed. Companies should determine whether retroactive or current quarter ERC credits are most advantageous for them after carefully considering all aspects of their return. The timing of filing the amendment needs to be considered carefully – if a company fails to submit it within one year from the original filing date, they will not be able eligible for any ERC credits at all.
It is important to remember that if an employer has already made quarterly payments with respect to wages paid during 2020 which makes them eligible for either retroactive or current quarter ERC credits, claiming those credits by amending your 2020 tax return will likely require:
- Additional payments once your amended return is filed and processed.
- Consultation with an experienced tax professional to choose what option works best in your business context.
How to Amend Your Tax Return for Employee Retention Credit
Amending your tax return to claim the Employee Retention Credit (ERC) can be a complicated and time-consuming task. There are several steps involved, so it’s important to understand exactly what is required. The Internal Revenue Service (IRS) offers forms, instructions, and step-by-step instructions on how to amend your tax return. Additionally, it is important to keep records of all financial activity related to the ERC.
In general, taxpayers who have already filed their returns must submit an amended U.S. individual income tax return (Form 1040X) if they wish to claim the employee retention credit for 2020. The Form 1040X must specify that the taxpayer wishes to amend their return due to the Emergency Retention Credit for employers affected by COVID-19 pandemic (Section 2301). Note that information from any other sources such as a payroll provider or financial institution may also need to be included with this form.
The IRS also requires taxpayers who are amending their returns for purposes of claiming the ERC to attach IRS Form 941-X if they reported employer taxes on Forms 941 in one or more calendar quarters during 2020 and want a credit for those taxes on the amended return for 2020 (the same form may be used by both self-employed individuals and employers). To avoid delays in processing, taxpayers are encouraged to attach an explanatory Statement of Fact identifies which quarter they’re claiming a refund or credit under ERC; as well as invoices or other documents substantiating its wages paid or incurred in that quarter along with Form 941-X.
Additionally, correcting entries should be made on future Forms 941 beginning in 2021 as appropriate if claimed wages differ from what you previously reported on Form 941 for 2020. It’s important also that taxpayers maintain records related to calculations and appropriately attached noted forms for at least four years following submission of their amended returns otherwise penalties could apply under Sec 6721 – Accuracy Related Penalty per section 6662(b)(2).
What Forms Do You Need to Amend Your Tax Return for Employee Retention Credit
If your business has hired, paid wages, and incurred expenses during the 2020 tax year, you may be eligible to take the Employee Retention Credit (ERC) on your company’s tax return. To do this, you need to file an amendment for your 2018 or 2019 tax return.
The forms you will need vary based on whether you’re filing an amended return for 2018 or 2019. For 2018 returns, you will need Form 1040X and Schedule A if applicable. Additionally, businesses that originated in 2018 and kept payroll records through 2020 can use Form 941-X to claim any refundable EPSC amount they were not able to take a credit for in 2018 or 2019 due to insufficient information.
For the 2019 returns, businesses that have already claimed the ERC should use Form 1040-X and Schedule A if applicable. They should also include a copy of Form 941-X if they are claiming any additional refundable credits due to increased wages during 2020.
Businesses that did not originally claim the ERC for their 2019 returns should also use Form 1040-X and include Form 941-X as well as whatever other relevant forms such as Schedules C or F are necessary in order to accurately report information related to their income documentation.
No matter what kind of amendment you’re filing for your taxes this year in order to claim the ERC, it’s important to keep detailed records of all wages paid and expenses incurred between January 1st – December 31 2020. This will help ensure accuracy with both the credit amount claimed and any deductions taken related to wages paid during this period.