The Employee Retention Tax Credit (ERTC) is a valuable tax credit that helps businesses offset the costs of paying their employees during the COVID-19 pandemic. The ERTC has been a great way for businesses to keep their employees employed during these tough times.
However, it is important to understand the rules and regulations for the credit and if it needs to be paid back eventually. Let’s take a look at the details of the credit and how it works:
Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a tax credit that employers can claim to incentivize employee retention during the COVID-19 pandemic. The credit applies to wages paid between March 13, 2020, and December 31, 2020.
It reimburses employers with a credit of up to $5,000 per employee if certain eligibility criteria are met. The ERTC allows employers to reduce their federal employment tax burden by up to 50% of social security wages paid in each quarter up to $10,000 for all eligible employees for the entire year – meaning a total maximum credit of $5,000 per employee for 2020. The Internal Revenue Service (IRS) will not require the employer payback any of the money received from the Employee Retention Tax Credit program.
To qualify for the Employee Retention Tax Credit (ERTC), a business must have operations that are fully or partially suspended due to a COVID-19 governmental order, or have a significant decline in gross receipts. To receive the ERTC, the business must meet the below-listed criteria:
- Eligible employers must have fewer than 500 employees
- must have suffered a decline in gross receipts
- and must not have received a Paycheck Protection Program loan.
All of these eligibility requirements must be met in order to claim the ERTC.
In order to be eligible to receive the Employee Retention Tax Credit, employers must pay wages to their employees or contractors during either of the following qualified periods:
- For those reporting using calendar year, the qualified periods are:
- 1) March 13-December 31, 2020
- 2) January 1-June 30, 2021.
- For those reporting using fiscal year, the qualified period is: The same 12-month period beginning after February 15th and ending before June 16th of either 2020 or 2021.
Qualifying wages refers to wages paid for which an employer would be allowed a deduction under IRC§162(a), such as noncash fringe benefits and vacation costs. In addition, wages for which an employer excludes from gross income under IRC §125-132 (Cafeteria plans) and qualified expenses reimbursed by the plan are considered qualifying wages when the employer determines eligibility for ERTC credits. For employers participating in Welfare Benefit funds established under IRC §501(c)(9), benevolent association funds (IRC §501(c)(8)) or employee benefits trusts (IRC §501(c)(18)), such contributions are considered qualifying wages when determining eligibility for ERTC credits.
Businesses that have experienced either a full or partial suspension of their operations due to COVID-19, or those that have experienced a significant decline in gross receipts, may be eligible for the Employee Retention Tax Credit. The criteria and qualifications vary from state to state, so check your local guidelines.
The following types of businesses may qualify for the credit:
- Employers who are subject to mandatory closures due to a COVID-19 related governmental order;
- Employers whose revenue declined during the quarter by more than 50% compared to the same quarter in 2019;
- Employers who employ 100 or fewer full time employees (or part time equivalents); and
- Certain self employed individuals.
In addition, employers must meet certain eligibility requirements when filing for this credit including maintaining accurate records of total wages paid each quarter, as well as any relevant other business expenses necessary to claim the credit. Last but not least, employers must also keep track of all documentation providing evidence of eligibility for and application of the credit towards payroll costs or health plan expenses such as copies of quarterly payroll tax returns and Form 941s. They may also need to retain records including written statements from their employees about qualifying wages earned and paid during the covered period specified by the IRS.
How the Employee Retention Tax Credit Works
The Employee Retention Tax Credit (ERTC) is a federal benefit available to qualifying employers affected by the COVID-19 pandemic. This tax credit is designed to incentivize firms to retain their employees and offset the cost of wages paid to them. The credit is designed to reimburse employers for a portion of their wages paid to those employees.
It is important to understand the details of how this credit works, including whether it needs to be paid back by the employer.
Calculating the credit
The Employee Retention Credit (ERC) is a tax credit for employers affected by the COVID-19 pandemic. The credit is available to businesses of all sizes and certain non-profit organizations that have been subject to full or partial shutdowns, have experienced a significant decline in gross receipts, or have made certain small business loans. This credit can help offset the cost of providing health care and other benefits.
To calculate the amount of the ERC, you will need to know your average number of full-time employees during 2020 and your eligible wages paid in each calendar quarter of 2020. Once you’ve identified these amounts, you can use the following formula to calculate your ERC:
- Eligible wages paid per calendar quarter X 50% X 6 months = Credit amount for year
Once the amount of your ERC has been calculated, you may be eligible for a refundable payroll tax credit if your calculated ERC exceeds amounts already included as a payroll tax exempt from Federal Insurance Contributions Act (FICA) taxes from previous quarters. If this is the case, you must file Form 941-X in order to receive any remaining employee retention tax credits you are due. Note that any unused refunds cannot be carried forward into future years and must be paid back in full if not used.
Claiming the credit
Claiming the Employee Retention Tax Credit is relatively straightforward. As with most tax credits, you must submit an IRS form to take advantage of the program. The IRS has created Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, specifically for the Employee Retention Tax Credit.
Businesses may apply the credit against their quarterly federal payroll taxes or receive a refund of excess amounts paid. Employers may not claim more than applicable limits based on their aggregate number of full-time employees during 2020 and 2021. Employers must also check eligibility requirements to claim certain credits against income tax withheld from employee wages and reported on Forms 941/943/944/CT-1, which can be found in Publication 15 (Circular E).
Certain employers that are members of an “opting in” business group are eligible make taxable wage payments under Section 139C that are allowed as part of their regular wage payments to recover ERTC expenses. See IRS Form 8974 & Instructions here for more information about eligiblity requirements related to this option and others related to business group across multiple calendar years or portion of a year.
If you are eligible for the Employee Retention Credit, you can make changes at any time throughout your fiscal year, as long as all risk factors remain constant and eligibility requirements haven’t been violated. Please consult a qualified tax professional or other knowledgeable individuals who can advise on specific laws surrounding your individual circumstance and provide resources regarding how the Employee Retention Tax Credit works for both employees and employers alike in order to comply with necessary regulations whenever making decisions about taxation strategies related to this credit program.
Does the Employee Retention Tax Credit Have to Be Paid Back
The Employee Retention Tax Credit (ERTC) was created as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act to help businesses offset the cost of keeping their employees on the payroll during the Coronavirus pandemic. But does the ERTC have to be paid back? The answer is no. The ERTC is a fully refundable tax credit, meaning businesses don’t have to pay it back.
Let’s explore the specifics of the ERTC and how it can help businesses going forward:
Understanding the repayment provisions
The Employee Retention Tax Credit (ERTC) is an essential part of the Coronavirus Aid, Relief, and Economic Security Act. This provision provides a wage-based tax credit to employers in order to help them remain open during the pandemic. While the ERTC has without doubt provided vital assistance to hard-hit businesses across the US, many employers remain uncertain as to whether they will be expected to pay it back at some point in the future.
Under this program, an employer may qualify for a tax credit of up to $5,000 per employee if its operations were fully or partially suspended due to governmental orders restricting movement or commerce related to COVID-19; or if it experienced significant economic hardship as evidenced by a decline in gross receipts of at least 20%. The credit can be claimed as part of quarterly estimated taxes and is refundable up until December 31st.
The repayment provision works differently for those employers who elected not to have their ERTC applied against documented wages paid during 2020. If an employer does not choose this option, then any ERTC generated will become subject to recapture rules in 2021. This means that any amount claimed from January through June 2021 will ultimately need to be repaid when filing taxes by January 15th 2022.
Therefore, while there are a range of benefits associated with taking advantage of the Employee Retention Tax Credit program – including significantly reduced payroll taxes throughout 2020 – employers who received such credits may still be liable for some level of repayment depending on their individual approach and taking into account the unique circumstances that preceded 2021 and beyond. It’s important for businesses across all sectors therefore determine how best they can optimize their approach taking into account such information prior making key decisions on tax liability relief options going forward.
Repayment of the credit
The CARES Act provides an employee retention tax credit of up to 50% of qualified wages paid by employers whose businesses have been severely impacted by the coronavirus pandemic. The credit is retroactive to March 13, 2020, and is available on wages paid through December 31, 2020.
So does the employee retention tax credit have to be repaid? The answer is no – the credit does not need to be repaid, as long as all criteria are met. However, employers must also be aware that if this tax credit was claimed for a quarter in which the employer received forgiveness of loans made through the Paycheck Protection Program (PPP), then some or all of the amount must be repaid. Specifically, an employer will have to repay an amount equal to its employee retention tax credit that was claimed for any quarter in which its PPP loan is forgiven.
Thus, it is important for employers taking out a PPP loan and claiming the employee retention tax credit in 2020 to carefully consider repayment implications if they plan on having their PPP loan forgiven at the end of this year. Employers should plan ahead for potential overpayment scenarios where repayment might become necessary or should consider not pursuing both programs in order to avoid having repayment requirements down-the-line.
To conclude, the Employee Retention Tax Credit does not have to be paid back. The ERTC was created under the CARES Act and is a fully refundable credit for employers who offer health insurance coverage to their employees. This means that the tax credit can be used to offset payroll taxes and other employer-paid taxes up to dollar-for-dollar equal to the amount of the credit claimed on a quarterly basis.
Employers are allowed to keep any excess credits received, but once the credit is claimed, it cannot be paid back or taken away. This makes it a great way for employers affected by COVID-19 to keep their staff and stay afloat during these uncertain times.