Employee Retention Tax Credit How to Apply?

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Overview of Employee Retention Tax Credit

The Employee Retention Tax Credit is a program that allows employers to claim up to 50% of eligible wages paid to employees in 2020-2021. This credit is meant to help employers cover the costs of employee wages during the COVID-19 pandemic. Let’s go over the basics of this program, as well as how to apply for the credit.

Eligibility Requirements

Employers who claim the Employee Retention Tax Credit (ERTC) must meet several eligibility requirements to qualify for this tax credit. All employers, regardless of size, can potentially qualify if they experienced a full or partial suspension of their trade or business operations due to an imposed government order, or they experienced a significant decline in gross receipts. Taxpayers may also claim the ERTC if their business has been adversely affected by the COVID-19 pandemic and are not otherwise eligible for other relief programs.

To qualify for the credit, employers must have fewer than 500 full-time employees (or fewer than 1000 full-time equivalent employees) on average throughout 2020. Additionally, employers cannot receive a tax credit under both the Employee Retention Tax Credit and credits available under other relief provisions such as Paycheck Protection Program funds.

The amount of qualified wages eligible for the credit phases out once a taxpayer’s gross receipts exceed more than 80% of its prior year’s equivalent quarters’ gross receipts. Moreover, no more than $10,000 in wages paid during any quarter period is eligible for the credit. The amount of qualified wages allowable is significantly greater when businesses have closed due to governmental shutdown orders. Employers can receive up to 50% reimbursement on salary up to $10K per employee per quarter in those circumstances. Special rules apply for finding FTEs in certain special cases like businesses with seasonal employees.

Tax Credit Amount

The employee retention tax credit (ERTC) is a federal refundable tax credit that businesses can claim for each eligible employee. It is intended to help employers keep employees on their payrolls, even during the COVID-19 pandemic. The amount of this credit may vary depending on a variety of factors including the size of the business and the average wages paid to employees.

For businesses with fewer than 100 full-time employees, the rate is 50% of up to $10,000 in wages paid to an eligible employee during 2020 or 2021. This means that employers may be eligible for up to $5,000 per employee in qualified wages and salary.

For businesses with 100 or more full-time employees, the rate is 70% of up to $10,000 in wages paid between March 12, 2020 and December 31 2021; however this additional 20 percent will apply only if certain conditions are met. This means that employers may be eligible for up to $7,000 per employee in qualified wages and salary.

How to Apply

The Employee Retention Tax Credit (ERTC) is designed to assist employers that are struggling financially due to the COVID-19 pandemic. The tax credit is meant to help employers offset the costs of employee wages and health care benefits.

Applying for the ERTC is relatively straightforward and can be done online. In this article, we will walk through the steps of how to apply for the ERTC:

Register with the IRS

Employers who are eligible for the Employee Retention Tax Credit need to first register with the Internal Revenue Service so that they can claim the credit. This process begins with filling out Form 7200, Advance Payment of Employer Credits Due To COVID-19, and submitting it to your local IRS office or mailing it to:

  • Internal Revenue Service
  • PO Box 37910
  • Hartford, CT 06176-7900

When you receive a confirmation from the IRS that your registration is complete, you can begin entering data in Part III of Form 7200. You will need your employer identification number and details about wages paid to employees during each quarter since March 12, 2020. After that is complete, enter all wages paid excluding those amounts already claimed in Part III on Part IV. There, you will also have an opportunity to request an Advance Payment of the tax credit in anticipation of filing Form 941 quarterly payroll tax returns or Form 944 annually.

When filing quarterly reports such as Forms 941 or 944 employers must finally apply for employee retention credits by indicating their eligibility and claiming the amount due when submitting their respective report forms. To qualify as an employer who has fully or partially suspended operations due to COVID-19, employers must include schedule R (Form 941) with their report form indicating their reason for claiming credits. Those who are not required to file any payroll forms simply need to wait until the end of their 2020 taxable year when they can claim those credits on Form 941X with respect to wages or qualified health plan expenses incurred during this period.

File Form 941

Form 941, officially known as the Employer’s Quarterly Federal Tax Return, is a form used by employers to report federal withholding taxes quarterly. Employers must use this form to submit their federal income tax withholding, Social Security tax and Medicare taxes. Businesses that are subject to Form 941 include corporations, partnerships, LLCs, sole proprietorships and nonprofit organizations.

The filing frequency of Form 941 is based on how much money your business has withheld from wages during the course of the quarter. If the total is more than $2,500 for either Social Security or Medicare taxes (or both together), then it must be filed and postmarked by the end of the month following the close of each quarter. If less than $2,500 has been withheld, then a push out date is allowed every other quarter.

To complete and file Form 941 you will need payroll records such as W-2s that detail employee earnings and all withholdings in addition to information on deposits made to cover these payments during the period in question. Completion instructions may be found on page 2 of Form 941 along with an example on page 4 which can help illustrate common discrepancies pointed out in deficiency letters sent by IRS when errors are noted. Businesses should attach any corrected Forms W-2c needed for this period if two or more were previously filed for any employee(s). Finally businesses should make sure there is enough money in their Treasury Tax & Loan account linked from their EFTPS account to cover any payment due before filing either electronically through EFTPS or paper mail via USPS.

Calculate Eligible Wages

The Employee Retention Credit is based on eligible wages paid to employees during the covered period and certain other expenses. Qualifying wages are those that paid in otherwise taxable wages while the business was fully or partially suspended due to COVID-19, or when gross receipts were less than 50% of what they were in the same quarter in 2019. To calculate eligible wages, you must determine your average number of full-time employees during 2019 and then use this to adjust the quarterly wage limit for 2020.

If you had fewer than 100 average full-time employees in 2019, then you should start by using the maximum wage determination for each quarter:

  • Q1 – (up to $10,000/employee)
  • Q2 – (up to $5,000/employee)
  • Q3 – (up to $5,000/employee)
  • Q4 – (up to 10,000/employee)

To determine eligible wages for employers with more than 100 average full-time employees during 2019:

  1. Calculate total payroll costs for all of your employees between January 1 and December 31 = x
  2. Calculate total hours employed by all of your employees between January 1 and December 31 = y
  3. Multiply x by 2.5 percent (.025), which equals z
  4. Divide z by y
  5. Multiply this number (#2) by each employee’s annual salary
  6. This is the maximum amount that will count as an eligible expense when filing your claim.

Claim the Tax Credit

The earned income tax credit (EITC) is a federal income tax credit that can help lower-income families and individuals reduce their tax liability. To claim the EITC, you will need to fill out IRS Form 1040. This form will include the appropriate worksheets, schedules and instructions for how to calculate your EITC amount and if you qualify for it.

To be eligible for the EITC, you must meet certain requirements with regards to your level of earnings, investment income and how many dependent children you have in your household. It is important to review the IRS publication 596 meticulously before filing taxes as eligibility requirements can change from year to year.

In addition, some states also offer a state-level earned income credit (SCEIC) that supplements the federal version of this program. If you’re a resident of one of these states—California, Louisiana, Montana, North Carolina or Washington—you may be able to take advantage of this additional credit as well.

To help further offset your total tax bill, you may also consider taking advantage of additional credits such as the child tax credit or education credits like the American opportunity tax credit and/or lifetime learning credits. Be sure to check with a qualified tax advisor prior to filing taxes so that you don’t miss any deductions or credits available to help reduce your total taxable liability.

Additional Resources

The Employee Retention Tax Credit (ERTC) is a federal tax credit providing refunds of up to $5,000 to employers who retain their employees and continue to pay them salaries and wages during the COVID-19 pandemic. Many employers can benefit from this tax credit, but it is important to understand the eligibility requirements and the process for applying for the ERTC.

This section will provide additional resources for employers to help them understand and apply for the ERTC:

IRS Website

The Internal Revenue Service (IRS) website is a helpful source of information related to taxes in the United States. There you can find tax forms and instructions, as well as useful tools like the “Where’s My Refund?” tool and the Taxpayer Advocate Service. Visitors can also access answers to frequently asked questions, view important notices and connect with free, professional tax preparation assistance.

Additionally, IRS offers options for filing taxes electronically or via mail. The IRS website is an ideal resource for those seeking guidance on filing their federal income tax returns.

Small Business Administration Website

The United States Small Business Administration (SBA) is an independent federal agency that provides assistance to small businesses. It has tools, resources and guidance available to help small businesses manage their operations and access federal relief programs, such as the Employee Retention Tax Credit (ERTC).

The SBA website can provide specific information about the ERTC and how to apply for it. The website includes information on:

  • eligibility requirements for the ERTC,
  • how to determine the amount of credit a business could qualify for,
  • filing deadlines,
  • contact information for representatives in the SBA’s Office of Capital Access and Program Advocacy branch, which handles inquiries about the ERTC program and other tax issues related to businesses.

Any business interested in applying for the tax credits should review all related documents closely before submitting an application. Details on filing procedures are also included on the SBA website, along with potential issues that could arise or other additional forms or documents needed when applying for credits. Links to applicable updated regulations can also be found here. Business owners should carefully review all guidance materials before submitting applications as it may change periodically.

State Tax Agency Website

In addition to understanding the four major coffee roasts, looking for resources beyond coffee labels can be helpful in deciding which coffee variety is best for you. One such website is the state tax agency’s website. The state tax agency offers an online calculator which can help consumers to determine the sales tax they owe on the purchase of the coffee beans or packaged grounds. With this knowledge, individuals will be able to estimate and compare prices before choosing a variety of coffee.

Additionally, visiting their website can provide additional resources regarding taxation regulations, as states may have different policies surrounding sales taxes on certain products such as coffee beans and pre-ground packages.

For more information about your state’s taxation policies visit your state’s tax agency website for more detailed information.