Employee retention tax credits (ERTC) are a powerful tool used by businesses to help offset the costs associated with retaining employees during a pandemic or economic downturn. These tax credits allow employers to reduce their taxable income up to a certain amount for each qualifying employee that is kept on their payroll for a specific period of time.
When ERTC were first introduced under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in 2020, the goal was to provide incentives to employers who kept their employees on the payroll despite suffering from business losses due to the pandemic. The intent was to help employers retain jobs and slow down layoffs caused by economic hardship while stimulating economic growth.
These credits are designed with several key components, including:
- What types of employers are eligible
- How much of a credit they can receive
- How long it will last
If you’re an employer or owner who may be affected by these programs, understanding how employee retention tax credits work is an important part of staying in compliance and taking advantage of available financial assistance.
Overview of Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was established by the CARES Act in 2020 to help businesses offset pandemic-related losses and encourage businesses to keep as many employees in their employ as possible. It provides certain eligible employers with a benefit in the form of a refundable credit against certain employment taxes equal to 50% of eligible wages paid to employees from March 12, 2020-December 31, 2020.
To understand how the credit works, let’s take a closer look at how it functions:
The Employee Retention Tax Credit is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, financial assistance for businesses impacted by the coronavirus. The credit is available to any employer with fewer than 500 full-time employees (FTEs).
In order to qualify for the credit, an employer must meet certain criteria:
- Have had their operations partially or fully suspended due to a COVID-19 mandate; or
- Experienced a significant decline in gross receipts (greater than 50%) as compared to 2019 Q1.
Additionally, employers must have failed to receive a Small Business Interruption Loan under either the Paycheck Protection Program or an Economic Injury Disaster Loan. Further criteria may apply in certain situations, so it’s important to read all instructions carefully if you’re considering applying for this credit.
Benefits of Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) can provide employers with significant financial relief during the COVID-19 pandemic. The ERTC was first introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in spring 2020 and has recently been extended through 2021. The credit targets businesses – particularly small businesses – that have experienced a significant decline in gross receipts or have been forced to partially or completely suspend operations due to the health crisis caused by the coronavirus.
Employers can take advantage of several benefits associated with the ERTC, including:
- Reduced wage costs: Eligible employers can claim up to $5,000 per employee in tax credits for withholding up wages. This may help offset wage costs associated with keeping employees on payroll throughout the pandemic.
- Increased liquidity: This credit is also a great way for businesses to free up cash flow if their revenue has decreased due to COVID–19. Businesses that qualify can claim retroactive refunds for missed tax credits from early 2020 and will be eligible for up to 70% of qualified wages paid throughout 2021.
- Saving jobs: Keeping valued employees on payroll during this unprecedented time is possible with assistance from this tax credit when times are tough.
- Retaining employee skills: With access to this tax credit, companies are able to retain skilled workers during this challenging period rather than having them leave and forcing them to look elsewhere when they need those same employees back at full capacity after recovery begins.
These benefits demonstrate how being an eligible employer of ERTC can increase liquidity, provide tax savings and support employee retention – all while saving jobs through uncertain times and boosting company morale.
How to Claim the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was created as part of the CARES Act to incentivize employers to keep their employees on their payroll during the COVID-19 pandemic. This tax credit can cover up to 70% of an employee’s wages, making it an attractive option for businesses.
Let’s take a look at how to properly claim this credit:
Calculating the Credit Amount
The employee retention tax credit amount is calculated as a percentage of wages paid. Generally, the credit amount is equal to 50% of qualified wages paid to employees between March 12, 2020 and January 1, 2021 (or an earlier date specified by the President); up to $5,000 of wages per employee. However, employers with greater than 100 full-time employees may be eligible for only a portion of the credits on a prorated basis.
For these employers, only qualified wages paid during periods when operations are fully or partially suspended due to a governmental COVID-19 related action are eligible for the full 50% credit rate; all other qualified wages are eligible for only a partial credit rate (40%). The following taxable years and related maximum credit amounts can help you determine how much the Employee Retention Tax Credit may be worth:
- 2020: Up to $5,000 per employee in credits
- 2021: Up to $7,000 per employee in credits
These figures reflect total amounts that can be claimed if both 2020 & 2021 are taken into account – but remember that no single employer can claim more than $10,000 total in qualified wages ($5K if they’re under 100 full-time employees) per employee.
Filing the Claim
When filing for the ERTC you will be required to use Form 941 in addition to the IRS’s new Form 7200, which is expected to be released July 15, 2020.
When preparing the claim on Form 941, employers must elect the qualified wages and qualified health plan expenses they wish to claim. The maximum amount of wages that can be claimed is $10,000 per employee and the maximum health plan premium reimbursement is also $10,000. Employers must apply these limits on a per employee basis instead of against total employees or total wages/expenses.
You will also need to certify various requirements on the form in order to ensure you qualify for an ERTC Advance Credit payment. A list of certifications includes:
- You had an active trade or business in 2020;
- Your eligible wages/health plan expenses are results from COVID-19 related circumstances;
- No other federal assistance other than ERTC was claimed or will be claimed for any portion of your eligible costs.
Form 7200 should then be filled out and submitted along with a summary listing all relevant information about your potential claim such as: employees’ names, Social Security numbers, wages paid that are subject to the credit including health care expenses and total gross amount of credits you are claiming for qualified wages and qualified health plan expenses not covered by other forms of federal assistance.
Once filed with Forms 941 and 7200, you should expect additional confirmations from employers before any payments are received as they investigate any questionable claims submitted. Employers should keep all records regarding their claim handy during this review process so they can respond quickly if asked to do so by IRS representatives.
In conclusion, employee retention tax credits are an effective way for businesses to retain their most valuable employees in times of crisis. By understanding how they work and the criteria that must be met in order to qualify, businesses can ensure that their organization obtains the best possible benefits while ensuring compliance with local, state and federal regulations.
Keeping valuable employees and implementing the right tax strategies can have a significant impact on a business’s bottom line.