The Employee Retention Tax Credit (ERTC) is an incentive designed to help employers retain and continue paying employees affected by the Coronavirus Disease 2019 (COVID-19) pandemic. This article will provide you with information on whether you are required to pay back this credit.
The tax credit is administered through the Internal Revenue Service (IRS) and gives employers up to a maximum of $5,000 for each employee. The amount of credit allowed depends on the average number of employees retained and the wages paid between March 13, 2020, and December 31, 2020. Employers are also able to benefit if they maintain wages for employees that have had reduced hours as a result of COVID-19.
Because this is a tax credit, not a grant or loan, it does not need to be paid back unless it was claimed in error or fraudulently. Additionally, if there has been an overpayment created due to filing an amended return after claiming the ERTC in 2021 then repayment may be necessary. Moreover, if the wages paid during this time frame do not meet requirements outlined by the IRS then an employer may be responsible for repaying expenses associated with the ERTC.
Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit is a refundable tax credit designed by the U.S. government to provide financial support to businesses during the COVID-19 pandemic. It offers a refundable tax credit of up to $5,000 per employee to employers who retain their employees during the pandemic.
This article will provide an overview of the employee retention tax credit and answer the question, do you have to pay back the employee retention tax credit?
Who is Eligible for the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) was created in response to the economic downturn caused by the Coronavirus disease (COVID-19). This tax credit allows employers to claim up to $5,000 for each eligible employee who received wages during a qualified period. The credit is taken as a payroll tax deduction and claimed on Form 941 of your business’s quarterly federal tax return.
To be eligible for the ERTC, an employer must have experienced one of two conditions:
- significant decline in gross receipts or
- been fully or partially suspended by governmental order due to COVID-19.
Employers can determine if they experienced either condition when filing their 2020 Form 941. Additionally, an employer must have met all criteria set out in Internal Revenue Code section 2301 or 2302.
Eligible employees are those who received wages during mandated shut down periods and/or while experiencing gross receipt declines related to COVID-19. For employers under common control, all entities within such common control are treated as one employer for purposes of eligibility and receiving the ERTC. All wages paid between March 13, 2020, and December 31, 2020 may be counted for determining ERTC eligibility including annual bonuses and employee overtime compensation. To qualify for full benefit of the ERTC it is important that employers take note of these parameters when calculating total wages paid during this period.
What is the Employee Retention Tax Credit Amount?
The Employee Retention Tax Credit (ERTC) is an incentive created by the CARES Act, which enables employers to receive a refundable tax credit against certain payroll taxes equal to 50% of qualified wages paid to employees after March 12, 2020 through December 31, 2020. Qualified wages are capped at $10,000 per employee for the entire year or $5,000 for each calendar quarter.
The credit amount also varies depending on whether a business was fully or partially suspended during the quarter due to COVID-19 related orders from governmental officials limiting commerce, travel and group meetings (i.e., operations were impacted). If there was no full or partial suspension of operations during the quarter then employers are eligible for up to 70% of qualified wages paid between March 12-December 31 up to a cap of $10,000 per employee per year or 50% if there was a full or partial suspension.
Additionally, the ERTC applies no matter how small your business is provided that you meet other eligibility criteria established by the federal government such as:
- Not receiving Small Business Administration Paycheck Protection Program loans.
- Having gross receipts that are less than one half of your same quarterly receipts during 2019.
How to Claim the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is an IRS created credit that is available to businesses who have been impacted by the COVID-19 pandemic. The credit helps offset losses related to the crisis while incentivizing employers to retain employees by keeping them on payroll. To receive the ERTC, employers must apply and meet several eligibility criteria.
- To qualify for the ERTC, employers must first meet specific criteria:
- Experienced a decline in business activity during any calendar quarter in 2020 due to government orders related to COVID-19, when compared to 2019 revenue.
- Retain employees at their pre-pandemic levels of wages even during a decline in business activity. Or paid salaries or wages to employees from March 13 through December 2021 that are at least 50% of their wages from the same period one year prior for businesses with 100 or fewer full-time employees or 80% for employers with more than 100 full-time jobs.
- The maximum credit available for 2020 and 2021 is $10,000 per employee on up to $10 million in total credits claimed per taxpayer per taxable year during 2020 and 2021 combined (meaning $10 maximum credit per employee).
- Additionally, carrying net operating losses generated after 2018 forward offset any portion of the taxes that exceeded 50% of existing wages when it was allowable before the end of 2022 will not reduce this credit dollar amount based directly on those employees’ work hours or employment status without any exceeding pay amount limitation before 2022 expiration date.
- It also enables employers with qualified wages less than $640K up front provided if unemployment insurance exclusion has also been filed by them as part of their expenses until March 13th 2021 without undergoing additional testing standards earlier set forth under 2441 policies discussed below these sections too; making sure all wages qualify within certain limits regardless whether they apply towards UI benefit amounts or other potential exceptions defined even during prior years.
Once all requirements are met, then each employer qualifying should complete a Form 941 (only line 23a through 24b) each quarter can be used too claim eligible credits after paychecks have already been distributed accordingly – including qualified health plan premiums based off dollar for dollar amounts applicable minus applicable annuities otherwise noted too throughout consultation as well after reviewing findings reported either actively receiving social security beneficiaries also known as SSI payments shortly thereafter filing citizen ARRA notifications back onto same filing form months later since accrued costs data normally take some extra time following each particular filing phase turned in (with IRS).
Do You Have to Pay Back the Employee Retention Tax Credit?
The Employee Retention Tax Credit allows eligible employers to offset a portion of the wages they pay their employees during the COVID-19 pandemic and has been a lifeline to many businesses. It is important to know if you need to pay back the credit, and if so, how and when. This section will detail the answers to these questions.
Are There Any Restrictions on the Employee Retention Tax Credit?
The employee retention tax credit (ERTC) program established by the Coronavirus Aid, Relief and Economic Security (CARES) Act can provide up to $5,000 in wages per employee. Employers who are eligible and apply for the credit may be able to receive a credit against their employer Social Security taxes.
Although this can be significant financial support for businesses affected by the pandemic, there are some restrictions employers should be aware of when planning how to utilize the ERTC. These restrictions include:
- The ERTC program requires an employer to maintain its pre-pandemic employment levels, that is, no decrease in employees or wages during quarters one and two of the calendar year compared to 2019 levels. Failure to maintain these employment levels could disqualify an employer from claiming the credit with respect to wages paid during quarter one or quarter two of 2020.
- The way wages are calculated for purposes of the ERTC must take into account benefits and wage administration issues such as vacation time or bonuses paid during these quarters. As such, some wage amounts an employer claims as ERTC credits may not necessarily match what was actually paid out in cash wages.
- In addition, certain employees may not qualify for certain credits due to hours worked or other eligibility criteria set forth by statute or IRS regulations so special care should be taken when claiming this beneficial tax credit.
Thus, employers must ensure that they remain mindful of these restrictions before they begin claiming the credit in order to receive all available benefits while staying compliant with applicable laws and regulations.
How to Calculate the Employee Retention Tax Credit
Employers who have experienced significant economic hardship as a result of the COVID-19 pandemic may be eligible for an Employee Retention Tax Credit (ERTC). This credit is designed to incentivize employers to keep their workers on the payroll, rather than lay them off or reduce their hours. The ERTC provides up to $7,000 for each qualified employee for wages paid after March 12, 2020 and before January 1, 2021. For purposes of calculating the amount of the credit, wages are limited to $10,000 per employee from March 13th through December 31st.
The amount of the credit available for any particular calendar quarter is based on the employer’s average number of full-time employees during 2019 and 2020. For example, if an employer has 100 full-time employees in 2020 and 50 full-time employees in 2019, then their average number of full-time employees is 75 (100 + 50 ÷ 2). The ERTC amount would then be determined by multiplying this figure by $7,000. In this example it would be 75 x 7,000 = 525,000.
In order to take advantage of the ERTC credit scheme employers must identify their eligible wages and calculate the amount they are due under the terms of ERTC. Employers can retain up to 80 percent (80%) of their eligible wage costs even if they have laid off or furloughed some staff members while still being able to claim a tax rebate on all wage expenses incurred between March 13th and December 31st up to a maximum amount per employee as determined above ($10,000).
At this time there are no provisions that require employers who receive an Employee Retention Tax Credit (ERTC) payment from IRS rebate to pay back those amounts but compliance with relevant tax obligation remains ultimately with each individual company regarding employment taxes including FICA and FUTA withholding’s as well as any union dues that might apply when applicable so employer must still meet such obligations regardless whether they received any funds from IRS or not. Therefore all issues related with local labor laws including understanding state specific payment rules must remain in consideration when claiming ERTC.
What is the Maximum Employee Retention Tax Credit Amount?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit available to employers impacted by the COVID-19 pandemic. The ERTC provides businesses with a payroll tax credit against their federal employment taxes for payments made or deemed made after March 12, 2020 and before January 1, 2021 in an amount of up to $5,000 per employee.
The maximum amount of the ERTC depends on whether the employer’s average number of full-time employees during 2019 was greater than 100 or lesser than 100 employees:
- Employers with an average number of full-time employees in 2019 less than 100 may qualify for an ERTC equal to 50 percent of up to $10,000 total wages per eligible employee paid in 2020.
- Employers with an average number of full-time employees in 2019 more than 100 may qualify for an ERTC equal to 70 percent of up to $10,000 total wages per eligible employee paid in 2020.
Qualified wages are limited by the first $10,000 each quarter for all wages paid from March 13 through December 31, 2020. Wages paid after December 31st no longer qualify for the maximum available credit from each employee since this time period does not fall within either one or two quarters as supported by the CARES Act; payments made to any employee after December 31st are not considered qualified wages and therefore cannot be used as part of the wage base total when calculating ERTC credit eligibility.
Qualified health plan expenses incurred during this same period do count toward qualified wages even if they were incurred before March 13th but not paid until after March 12th; additionally all health plan expenses calculated during this period should be reasonable and necessary and relate directly towards providing healthcare coverage under a group health plan.
Qualifying employers must retain eligible employees between the date when their business was negatively impacted by COVID-19 shortly after launch (March 27th) until June 30th when potential unemployment benefits carried by passed stimulus legislation ended (June 30th).
In conclusion, employers can benefit from the Employee Retention Tax Credit for 2020 and 2021. The amount eligible for credit may vary based on the type of employer, as well as any applicable payroll taxes. Employers should work with their tax advisors to ensure they qualify and calculate the right amounts.
Employers also need to remember that these credits are considered taxable income, so they must be reported on businesses’ tax returns. Additionally, employers may have to repay some or all of the benefits received if wages remain at 80 percent or more of prior year’s wages in 2021.