Overview of Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a tax incentive provided by the government to help businesses keep their employees on their payroll during these challenging economic times. It is an important tool for retaining employees, and it can result in significant savings for businesses.
To learn more about the ERTC, this article provides an overview of the program and outlines how companies can claim the credit:
The Employee Retention Tax Credit (ERTC) is an incentive from the IRS for employers to retain their current employees. The Tax Credit is available to employers in the United States that have been financially impacted by COVID-19, such as businesses in operation on February 15, 2020 that were fully or partially suspended due to a governmental order, or had a significant decline in gross receipts.
To be eligible for the ERTC, employers must meet certain criteria:
- Must have had wages paid after March 12, 2020 and before January 1, 2021
- Must have wages paid to an employee who has been employed since at least March 12, 2020
- Must not receive assistance through the Paycheck Protection Program (PPP)
- Must have fewer than 500 employees at the time pay was earned
Additionally, wages used for Qualified Health Plan (QHP) expenses will not be eligible for credit. Furthermore, there are different eligibility requirements depending on whether an employer’s gross receipts declined versus if it was forced to suspend operations completely. Employers must also be aware of their certain filing requirements and restrictions when claiming this credit.
Types of Employees Covered
The employee retention tax credit is available to employers who are impacted by the coronavirus pandemic and keep employees on payroll. Eligible employers include those who, either fully or partially, suspended business operations due to a government restriction or have seen gross receipts fall in 2020 compared to 2019.
The credit applies to wages paid to employees between March 13, 2020 and December 31, 2020 and covers both full-time and part-time workers.
Employees eligible for the credit must have been on the employer’s payroll during either the period of March 13- June 30, 2020 or July 1 – December 31, 2020. Employers may take a credit up to $5,000 per employee per year (not including health insurance benefits) for wages paid during the applicable covered period.
The types of employees eligible for the credit fall under three categories:
- non-skilled workers who earn a wage or salary below an annual threshold ($1 million for each calendar year);
- seasonal workers hired for employment of fewer than seven months in any calendar year;
- qualified nonprofit workers with pay capped at $20.75 per hour as of July 1st.
Additionally, members of Indian tribes may be included if they are employed by an Indian tribal government or related organization (including businesses owned by an Indian tribal government).
Benefits of Claiming the Credit
Claiming the Employee Retention Tax Credit (ERTC) can provide a financial benefit to organizations affected by the coronavirus pandemic. As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES) of 2020, this refundable tax credit helps organizations retain employees and pay them wages or salaries. Qualifying employers may be eligible for up to 70% reimbursement for certain employee wages paid between April 1, 2020 and December 31, 2020.
The ERTC gives eligible employers a maximum allowable credit of $7,000 per employee, depending on their wages over the course of 2020. Most notably, the amount of qualifying wages is based on an organization’s average number of employees in 2019 – the higher the number, the larger the credit available.
- Reimbursement at up to 70 percent for wages paid to certain employees between April 1, 2020 and December 31, 2020
- Maximum allowable credit per employee is $7000 in qualified wages
- No limit on the total amount that can be claimed
- Works in tandem with federal relief payments from PPP loans
- Available for startups or newly formed companies if they began business operations prior to March 12th
- Eligible for payroll taxes already incurred prior to receipt of ERTC funds
Steps to Claim the Credit
The employee retention tax credit is available to employers to help them cope during the economic hardships of the pandemic. Eligible employers can claim a credit of up to $5,000 per employee for qualifying wages paid from March 13, 2020 to January 1, 2021.
To claim the credit, employers must follow several steps. Let’s take a look at what these steps are:
- Step 1
- Step 2
- Step 3
- Step 4
- Step 5
The employee retention credit (ERC) is a refundable payroll tax credit for employers, who kept their employees on the payroll during the coronavirus pandemic. To take advantage of this credit and receive credits against qualified wages and health plan expenses, employers must determine eligibility. This includes certain criteria that must be met to qualify.
First, employers must have partially or fully suspended operations due to a government mandated order, such as shelter-in-place regulations and other similar COVID-19 emergency orders that limit commerce, travel or group meetings. The business must also suffer a drop in gross receipts compared to the same quarter of the prior year in either 2020 or 2021. The refundable portion of this credit is available for wages paid to employees between March 13th, 2020 and December 31st, 2021.
In addition to being eligible based on requirements above, employers have different options depending on size and number of employees in accordance with qualified wages allowed per employee:
- If you have fewer than 100 full time employees you may claim up to 50% of qualified wages up to $10K per employee annually for the period from March 13th through December 31st each year;
- Employers with over 100 employees may claim an amount based on 70% of qualified wages including compensation for medical benefits per employee up to $10K annually from March 13th through June 30th and 40% after June 30th until December 31st each year.
Finally, businesses should be aware that if they participate in other COVID-19 financial assistance programs such as Paycheck Protection Program (PPP) loans or Economic Injury Disaster Loans (EIDL), they are not eligible to receive ERC credits unless they reduce the PPP loan forgiven amount by their ERC amount received during any tax year beginning after August 8th 2020.
Calculate the Credit Amount
The size of your credit depends on the information entered in your tax return and the eligibility factors associated with that. To begin calculating your credit, you will need to have information such as your filing status, income level, number of children, and other necessary details. When using a tax software or preparing the return yourself, you will need to follow certain steps such as:
- Entering personal and contact information
- Reporting income
- Claiming credits and deductions
- Adding any additional costs like mortgage interest or medical expenses
- Doing accurate math calculations
- Checking for errors before submitting final paperwork
- Filing state and federal taxes
- Calculating the size of the earned credit
- Receiving the credit from federal government in the form of a check or direct deposit to a bank account.
File Form 941
For businesses with employees, it’s important to file Form 941 to take advantage of the credit. This form is used to submit quarterly employment tax returns and claimed employee Social Security taxes. On Form 941, employers can utilize the Employee Retention Credit (ERC) as outlined by the CARES Act. Businesses must fill out Schedule R of this form in order to claim the ERC and reduce their reported payroll taxes accordingly.
When filing Form 941, employers should also consider how other credits may apply or interact with one another, including the paid leave credits established in the Families First Coronavirus Response Act. Additionally, businesses should consult with a tax professional or accountant before submitting a claim for their credit in order to ensure all necessary paperwork is submitted and avoid any penalties for incorrect filings or underreported taxes due.
Document Retention Requirements
To claim the Employee Retention Tax Credit (ERTC), employers must provide accurate records and documentation to the IRS to qualify. Employers must also meet document retention requirements to ensure the accuracy of their ERTC application. This includes keeping records such as wage and payroll information, tax return information, and more.
Let’s take a look at these requirements in more detail:
Records Needed to Prove Eligibility
When claiming the Employee Retention Tax Credit you need to retain certain records and documents for five years that validate your eligibility for the credit. These documents include:
- Payroll records for each employee demonstrating payment of wages, hours worked and employers’ expenses related to health care costs, including premiums paid and coverage amounts.
- Form 941 or equivalent payroll tax statements.
- Form W-2 or equivalent payroll records showing wages and tips paid.
- Documentation of employee health care benefits, including premiums paid and coverage amounts.
- State tax withholding forms reflecting withholding obligation imposed by their respective state laws.
- State unemployment insurance rate schedules used to calculate payments made under state through December 31, 2020.
- Any applicable agreements between US Treasury Department covering employees hired after February 15th 2020 that are eligible for the retention credit as a result of participating in a qualified internship program according to areas in the Consolidated Appropriations Act 2021 law, as applied to an employer that incurs qualified wages prior to December 31, 2021; such agreements must be renewed each quarter or year as specified in the relevant law or regulations. In addition to maintaining pay statements corresponding with payments relied upon from those agreements when calculating credits claimed on any quarter’s returns during this period.
Records Needed to Prove Credit Amount
The best way to prove the amount of credit extended to customers is to maintain complete records that include the original agreement, copies of credit applications and all written authorization documents. These records should also include billing, payment and collection information for each customer account. Additional records needed for complete retention are outlined below:
- Application documents: signed applications which authorizes the credit relationship and other related credit documents such as promissory notes or guaranties;
- Customer contact information: name, address, phone number and other identifying details necessary to establish a valid customer account;
- Credit line history: records detailing any changes in the customer’s credit line and an explanation of why it was changed;
- Billing statement history: copies of every billing statement sent to the customer detailing how much was owed each month, when it is due, listing charges for services or products provided since the last bill was issued;
- Account balance history: monthly record of current balance compared with total open amounts established on all invoices;
- Payment receipts: acknowledgements from customers when payments are made showing receipt date and amount remitted;
- Collection notices: mailings sent when payments are delinquent advising customers of their obligations including a demand for payment within specified time limits;
- Settlement agreements/documentation associated with sales of receivables if applicable;
- Voided checks/other transaction documentation used in accounts receivable management.
Records Needed to Support the Claim
To properly support an insurance claim, an insured party should maintain detailed records containing all pertinent information. This may include hard copies of documents, such as contracts and purchase agreements, as well as digital records in the form of emails and other communications. Businesses must also keep records of payments made in relation to the claim, including payments to vendors or suppliers involved. In addition to these documents, organizations should also retain any associated paperwork such as communications with insurers or adjusters throughout the process.
Additionally, it is important to document inspections that may have been conducted and any appraisals that were completed related to the claim. Photographs and videos taken of property or damages at the time of inspection can be incredibly useful in providing evidence for a successful resolution and should be securely retained for later use. By maintaining extensive records on the damages sustained, businesses can:
- Receive proper compensation for their loss or injury more quickly and easily
- Manage their resulting financial obligations
When claiming your Employee Retention Tax Credit, there are a few other considerations to keep in mind. This includes making sure you qualify for the credit, having properly tracked wages and other qualifying expenses, and understanding how to calculate the credit. Additionally, you must take into consideration the other changes to businesses due to the coronavirus in order to ensure a successful claim.
We’ll discuss these considerations in detail in the following section:
- Making sure you qualify for the credit
- Having properly tracked wages and other qualifying expenses
- Understanding how to calculate the credit
- Considering other changes to businesses due to the coronavirus
Interaction with Other Tax Credits
When determining your eligibility for income tax credits, it’s important to consider how other credits and deductions will interact with each other. For example, some credits depend on the amount of your adjusted gross income (AGI), which is based upon the combination of taxable income, deductions such as student loan interest and nontaxable items such as social security benefits.
It’s also important to know that depending on AGI levels, many tax credits have earned income and/or child care expense requirements that could reduce the amount you’re able to take.
State tax credits can also be taken into consideration when filing taxes. Many states offer additional credits related to charitable donations or education expenses. In addition, many states allow a portion or all of the federal credit to be taken on the state return if certain qualifications are met, such as filing certain forms or living in an area with high unemployment or poverty rates. Doing research on applicable state laws is essential for reducing total taxable income and possibly increasing any refund you are expecting.
It’s also important to consider other family members and how their credits may impact you when filing your taxes as a couple or family unit. For example, if your spouse qualifies for a specific credit but you do not because their AGI is lower than yours, it could adversely affect the total amount of the credit received due to their higher AGI weighting in most cases. This highlights the importance of understanding how different types of tax credits interact with each other in order to increase one’s return potential on joint returns or those involving multiple family members’ incomes together.
Impact on Unemployment Insurance Benefits
Unemployment insurance benefits are available to workers who have lost their job due to economic or other causes. In order to qualify for these benefits, however, a worker must first meet eligibility requirements, including meeting certain income guidelines. Even after the unemployed worker meets these requirements and begins receiving unemployment benefits, there are a few other things that could affect their UI benefits.
One such factor is the impact of working part-time on unemployment insurance benefits. Working part-time while collecting unemployment income can reduce the amount of benefits a person receives on a weekly basis, as well as reduce their maximum benefit amount overall. A worker’s weekly hours must not exceed more than 40 hours per week in order to maintain eligibility for regular UI payments during this time period. Any money earned by working over 40 hours will usually be deducted from that week’s unemployment check before any payments are made, thus leaving the claimant with less income than if they had remained unemployed.
Another factor that could have an impact on UI payments is the individual’s current financial state during the time they receive unemployment benefits. If a person has other sources of income such as investment or rental properties or pensions, these may be counted when determining how much someone qualifies for in terms of UI payments and thus reduce what they receive each week from unemployment checks alone. Lastly, attempting to use pension funds or fail to report other sources of supplemental income can lead to fraud accusations and termination of UI earnings for unruly claimants.
Impact on Other Tax Filings
Tax deductions related to claiming the employee retention tax credit, including costs reimbursable or deductible under the credit, should be considered when filing your business’s tax returns. You may have to increase or reduce other deductions or business expenses depending on your eligibility for and use of this credit. Some deductions that could be impacted include:
- Employer portion of payroll taxes: The employee retention tax credit reduces the employer’s share of payroll taxes that are normally due and eligible for a deduction. However, if you claim retentions credits in either 2020 or 2021, you will be required to remit the reduced amount of payroll taxes due as applicable.
- Qualified retirement plan contributions: When calculating how much you can deduct from your tax return for contributions to qualified retirement plans, take into consideration any employee retention credits used during the year because those amounts won’t be deductible.
- Unemployment insurance benefits: Because the amount due for unemployment insurance payments is often based on a percentage of total wages paid by an employer, claimants can potentially qualify for additional unemployment insurance credits if their wages have been reduced due to claiming available ERCs.