The Employee Retention Credit is a great way for employers to reduce their payroll taxes and get some financial relief during these unprecedented times. This credit can be claimed on your federal employment tax returns but it may require some extra steps to do so.
With this article, we’ll look at how you can claim the Employee Retention Credit and what additional steps you may need to take before submitting your tax return:
Overview of the Employee Retention Credit
The Employee Retention Credit is a refundable tax credit that is available to businesses to help offset the costs of funded wages paid to employees. This credit was established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020, and is set to expire at the end of 2021. Businesses may qualify for this credit so long as certain criteria are met and can apply for the credit by taking advantage of a claim form when filing taxes.
The Employee Retention Credit was designed to provide assistance during times when many businesses have faced economic hardship due to decreased consumer spending as a result of the pandemic. Specifically, it offers employers who experienced significant drops in revenue due to reduced customer demand or have had to close operations because of a COVID-19 governmental shutdown order with payroll tax credits for certain wages paid between March 13, 2020 and December 31, 2021. The payroll tax credits available under this program are refundable up to $7,000 per employee. Moreover, qualified wages paid or incurred after December 31, 2020 but before January 1, 2021 will receive an additional 4% reduction in Federal employment taxes that are liable on such wages.
Further details regarding eligibility requirements and application procedures can be found on our website or by talking with your accountant/tax advisor today.
Generally, employers are eligible to claim a tax credit when they retain their employee and pay them wages during a specific period of time. To qualify for the Employee Retention Credit, employers need to meet certain eligibility requirements. These requirements are specific to the tax year and must be taken into account when amending tax returns.
In this article, we’ll discuss what these requirements are and how to amend a tax return accordingly.
Who is eligible for the Employee Retention Credit?
In general, any employer that operates a U.S. trade or business is eligible for the Employee Retention Credit as long as it:
- Had operations fully or partially suspended due to a coronavirus-related governmental order;
- Experienced a significant decline in gross receipts; OR
- Wasn’t in operation during 2020 due to legal requirements related to COVID-19.
Additionally, employers must meet specific eligibility requirements:
- They must have employees on their payroll (not including self-employed individuals) and paid wages between March 12th and December 31st of 2020.
- All employers are subject to the Eligibility Requirements imposed by the Coronavirus Aid, Relief and Economic Security Act (CARES Act).
- Employers are limited to those who had 500 or fewer full time equivalent employees on average during the 2019 calendar year. This requirement of employee size applies per physical location of the work performed.
What are the requirements for the Employee Retention Credit?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Employee Retention Credit (ERC) in response to the economic and financial disruptions caused by the coronavirus. The ERC is a refundable tax credit that is available to employers who experience certain impacts due to the pandemic such as reduced gross receipts and fully or partially suspended operations. Qualifying employers can claim up to $5,000 per employee for wages paid between March 13, 2020 and December 31, 2020.
To be eligible for this tax credit, employers must meet certain requirements. These requirements include:
- Having a business operation that has been fully or partially suspended due to orders from an appropriate governmental authority related to COVID-19; or
- Experiencing a significant decline in gross receipts of more than 50%, comparing any calendar quarter in 2020 with the same calendar quarter in 2019.
In addition, businesses must meet size requirements:
- For businesses with more than 100 full-time employees in 2019 – wages are limited to those paid when no services were performed during any calendar quarter of 2020; and
- For business with fewer than 100 full-time employees in 2019 – all wages qualify.
Finally, qualifying employers can receive two credits: one for wages paid from March 13th through June 30th, 2020; and one for wages paid from July 1st through December 31st, 2020.
Calculating the Credit
If you’re eligible for the Employee Retention Credit, you may need to amend your tax return to include it. The credit can be applied to wages paid between March 12, 2020 and December 31, 2020 and is available to employers of all sizes.
In this section, we’ll look at exactly how to calculate the credit:
How to calculate the Employee Retention Credit
The Employee Retention Credit (ERC) is a 2020 refundable tax credit for employers that retain their employees after March 12, 2020, and before January 1, 2021. This credit includes wages paid to employees even if businesses are not currently operating due to COVID-19. It is important for employers to understand that amounts provided through the Paycheck Protection Program (PPP), which may also provide some credits similar in nature to ERC, do not count as wages towards the ERC.
Calculating the Employee Retention Credit accurately can save your business significant amounts of money. The credit is equal to 50% of employer’s qualified wages up to $5,000 per employee. Note that any amount received by the time of filing must be adjusted accordingly on the tax return or amended return will be necessary. Here’s how you should calculate it:
- Step 1: Gather relevant information You’ll need general information such as your business name/address and employee count as well as a list of full-time and part-time employees, wages paid in 2020 and/or eligible health care expenses incurred in 2020 plus income from all federal sources related to the affected months (March-December 2020).
- Step 2: Determine “Qualified Wages” Employers are allowed a maximum credit amount for each full-time employee who remains on payroll throughout the year with total qualified wages at $10,000 plus any health care expenses during the same period ($10,000 x 50% = $5,000). Part-time employees allowed 400 hours “Qualified Wages” of pay during this period with an additional limitation of adding health care expenses separate from other payment sums recorded separately for each employee ($5,000 x 50% = $2,500). Note that only salaries paid between March 12 – December 31 are eligible.
- Step 3: Claiming or Revising Filed Tax Returns Employers may claim their credits upon filing their respective taxes or revise already filed returns by completing Form 941 either quarterly or annually depending on whether they originally received credits while filing earlier returns; make sure amounts match totals upon reporting otherwise it may delay approval process or result in amendment filing afterwards. Additionally you’ll need relevant financial statements related specifically towards determining ERC eligibility covered under both IRS guidelines and state laws such applicable payroll taxes incurred up through December 31st later adjusted according post claiming code areas found when filling out Form 941 helping ensure proper math calculations preventing any discrepancies between submitted versus approved amounts later on when audited down line again possibly contributing towards adjustments within numbers prior approval risk potential false statement accusations made against businesses noncompliance possible penalties enforced instead waived away due accepted until later determined appeal adherence set standards originally set forth earlier preceding said date yet still followup accuracy parameters fulfilled oftentimes containing conflicting information often hard unravel wrongly overstated deductive number possibly flawed too late catch caught great deal have time familiarize yourself documentations available early properly prepare finance office application beforehand efficiently smoothly assuredly credibility validating satisfactory ending ends deliver desired outcome rightful expectations realistic timely successful submission defined precision explicity help overall satisfaction needed eventuate satisfied client many years come come establish trust framework foundational platform solidifies cordial relationship tax accountant alike recurrent contact bases anticipate lengthy longevity admiration drawn affiliation industries appreciate acknowledging services diversity programmatic practicality helpfulness indispensable invaluable measures correctly correctly correctly correctly correctly correctly correctly calculated recognized credible entities collaboration.
What are the tax implications of the Employee Retention Credit?
The Employee Retention Credit (ERC) is a tax credit that employers may be eligible to claim when certain criteria and conditions are met. The credit, which was established as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, applies to wages paid after March 12 and before January 1, 2021.
The ERC is a refundable tax credit up to 50% of qualified wages paid up to $10,000 in total wages per employee. Eligible employers are those impacted by COVID-19 operating restrictions or whose gross receipts declined by at least 50%, including businesses forced to close due to governmental orders related to the pandemic. The ERC applies only if an employer either (1) kept employees on payroll or (2) if the employer reduced their employees’ wages or hours.
In calculating the tax implications of the ERC, employers should consider four factors:
- Gross receipts test for Eligibility for Credit
- Taxable income limitations for claiming credit
- Timing of credit payments
- Any impact on Social Security taxes
Employers may also need to amend their tax returns from previous years depending on when they claimed other credits that can affect their eligibility for this new credit.
Amending Tax Returns
Making amendments to a tax return can be a difficult task. It’s important to know when an amendment should be filed and what specific steps must be taken to make an amendment. One part of the IRS Tax Code deals with the Employee Retention Credit, and an amendment may be necessary to take full advantage of the credit. Let’s take a closer look at the process of amending a tax return for the Employee Retention Credit:
When should you amend your tax return for the Employee Retention Credit?
For businesses that have already filed their tax return, it may not be clear when they should amend their taxes in order to take advantage of the Employee Retention Credit (ERC).
It is important to note that the American Rescue Plan stipulates that businesses who received Paycheck Protection Program (PPP) loans should use the funds for eligible expenses within 8 weeks after receiving the loan in order for them to be eligible for the ERC. Once these expenses are paid or incurred, then businesses can amend their tax returns with Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. Businesses should not file an amended tax return until all qualified wages and qualified health plan costs have been paid or incurred and recorded.
Businesses should update their information as of December 31, 2020 on Tax Form 941 “Employer’s Quarterly Federal Tax Return” so that it includes all applicable payroll information regarding wages and wages subject to employer’s share of Social Security and Medicare taxes. Then taxpayers may file Form 941-X if needed to receive credit for all qualified wages paid during 2020.
Form 8995 “Qualified Business Income Deduction Computation and Election Statement“, exhibits expenses that are refundable through the ERC program but cannot also benefit from PPP funds. Companies can utilize qualified information from Schedule C of your filing by utilizing a portion of this form to secure recovery related funding through credits rather than wage and/or payroll calculations associated with PPP loans.
Taxpayers must stop taking a deduction equal to ERCs when claiming tax credits in 2021 with amended returns for income earned in 2020 due to supplementing payroll expenditures which were previously offset by deductions taken on prior forms filed initially or via omitted occurrences or changes reported after the initial filing date. Amending tax returns correctly is incredibly important, as significantly different deductions can occur based upon if/when you choose to amend your taxes as well as understanding how acquired credits work within current income filings versus those filed under prior legislation before new rules began effecting current returns in February 2021.
How to amend your tax return for the Employee Retention Credit
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, eligible employers can take advantage of the Employee Retention Credit to help offset some of the cost of retaining employees.
To take advantage of this tax credit, you may need to amend your original tax return for the 2020 taxable year. This process can be intimidating, but once you understand how it works, it’s simple.
What You Need to Know
- First and foremost, you should know that if you’re eligible for the Employee Retention Credit and didn’t claim it on your original return, you can still claim it when amending.
- To qualify for the credit:
- Your business must either have experienced a full or partial shutdown due to orders from an appropriate government authority or have experienced a significant decline in gross receipts.
- The business must have employed no more than 500 full-time employees during 2020 or 2019.
- The employer must have paid wages or health insurance premiums associated with wages (e.g., employer contributions for employee healthcare coverage).
Amending Your Return
- When you’re ready to amend your return for the Employee Retention Credit:
- Form 941 materials such as payroll register reports will be instrumental in completing Form 941-X accurately and timely; if in doubt about any amount reported on Form 941 refer to these materials.
- Fill out Form 941-X accurately and completely but only make changes related to Corporation Retention Credit modifications on this form – no other corrections should be made here. On Lines 1a through 4b enter amounts as they were originally reported on Form 941 (only enter amounts related to ERC modifications); do not enter any additional payroll amounts here that weren’t included in your original filing; all subsequent lines are corrected totals; any taxes due are entered at Line 13 then credited at Line 14c; if no taxes are owed then just leave Lines 13 & 14 blank – sign then date when complete; attach reconciliation back up including copies of payroll registers used in computation. Provide paper copy of filed forms including backup documents via certified mail with signature required so there is proof that IRS has received amended form(s).
Having discussed the details of the Employee Retention Credit, it is important to note that these credits are fully refundable, meaning employers could receive a check even if they owe no taxes.
Filing an amended return is not required; however, those entities that previously claimed PPP loan forgiveness should understand that the amount excluded from gross income is no longer eligible for credit as part of the Employee Retention Credit. Amending prior year tax returns or filing claims for prior year credits may be necessary in order to take full advantage of credits available.
Overall, employers should take all necessary steps to understand how this credit works and which expenses are eligible for spending to earn credits. This will help them make sure that their books are accurate and up-to-date when it comes time to file taxes each year. Those businesses who have already filed their taxes without accounting for this credit should consider if amending their returns is in their best interest in order to realize all applicable savings.