Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a component of the Coronavirus Aid, Relief and Economic Security (CARES) Act. This new tax credit provides employers with an incentive to keep their employees during the pandemic-related economic downturn. Businesses that qualify for ERTC can benefit from a credit of up to $5,000 for each employee retained during the applicable period.
Let’s take a closer look at the ERTC and how to take advantage of this credit.
In order to be eligible for the Employee Retention Tax Credit, businesses must fulfill certain criteria. All businesses with less than 500 full-time or full-time equivalent employees are eligible to use this credit. Businesses with more than 500 full-time and/or full-time equivalent employees may still be eligible in certain situations, such as when a business’s operations were fully or partially suspended due to a COVID-19 related government ruling.
Businesses must have experienced either a significant decline in gross receipts, defined as at least a 20% decrease in gross receipts for any eligible quarter when compared to the same quarter in 2019; or have operations that were fully or partially suspended due to governmental order due to COVID-19 during all or part of the applicable calendar quarter, regardless of the amount of their gross receipts.
The employer must also demonstrate that they have either;
- 1) furloughed employees and/or 2) provided reduced hours and they are not expecting straight time wages for the employee based on past hrs worked; OR
- 1) retained employees but not paid them during the qualified period, paid out bonus payments, i.e. retention bonuses OR 2) faced workforce reduction due to lack of work resulting from pandemic related events such as closures.
To qualify for this credit an employer’s average number of FTE (defined by Internal Revenue code section 51(c)) must have declined since receiving taxable payments from tribal governments (Tribal 638 contracts). For taxpayers who cannot claim the exception above: The employer must generally show that their average number of FTE for 2020 is below 80% (2/3rds if tax-exempt organization) from what it was prior to receiving tribal payments (Tribal 638 contracts), and also show ineligible wages were higher than prior taxable payrolls prior to receiving tribal payment(s).
Under the Employee Retention Tax Credit (ERTC), employers may receive a tax credit of up to $5,000 per employee for qualified wages paid to employees between March 13, 2020 and December 31, 2020. The full credit is provided for wages paid up until December 31st that exceed the amount of wages paid during the same quarter in 2019.
In order to qualify for the credit, employers must meet certain thresholds for both their wages paid and number of employees. Generally speaking employers with more than 100 full-time employees will not qualify for those with fewer than 100 can receive a pro-rated credit based on their total number of employees.
Qualifying wages must meet all of the following criteria:
- Are incurred between March 13, 2020 and December 31, 2020;
- For employees who are furloughed or face significant reductions in hours due to COVID-19;
- For wages above amounts actually paid in Q1 or Q2 (more details on this provision below);
- For individuals performing services remotely due to COVID-19; and
- Are not eligible for another governmental wage support program such as a Paycheck Protection Program loan, state reimbursements or other forms of assistance.
Employers should also note that if they are regularly allowed to exclude federal income taxes from their FICA taxable wage base then they will also have nonqualified salaries that cannot be included when computing their ERTC data. The IRS defines nonqualified salaries as “wages subject to Social Security taxes for which an employer is able to claim an income tax deduction but is not entitled to a FICA tax credit or Wage Base Exclusion (WBE).”
Maximum credit amount
The maximum amount of the employee retention tax credit is 50% of wages paid up to $10,000 per quarter per employee. This means businesses may be eligible to receive up to $5,000 in total tax credits for each employee over all four quarters available for the credit. Certain businesses, such as small employers and businesses that were partially or fully suspended due to certain government orders, may qualify for a greater maximum credit amount of 70% and wages paid up to $10,000 per quarter per employee or up to $14,000 in total credits over all four quarters.
In general, employers who wish to file for this credit should not include payments from the Paycheck Protection Program (PPP) when calculating wages paid for purposes of determining their potential credits. There may be some instances when including PPP wages can still qualify for the employee retention tax credit based on specific criteria laid out by the Internal Revenue Service (IRS). Please consult with a tax professional if you have any questions on these exceptions.
How to File for the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a new tax credit for employers who keep their employees on payroll during the COVID-19 pandemic. To be eligible for the ERTC, employers must meet certain criteria and follow specific filing requirements.
In this article, we’ll discuss how to file for the ERTC, including:
- Which documents you will need to submit.
- The steps you should take to ensure your application is successful.
Gather the necessary documents
In order to file for and potentially qualify for the Employee Retention Tax Credit, employers must first gather the necessary documents. Specifically, employers must be able to demonstrate the period of shut-down or closure due to COVID-19 or a significant decline in gross receipts during any 2020 calendar quarter.
These documents may include any state issued closure orders, IRS or other federal agency issued guidance, payroll records that document a reduction in wages during either the time of closure or when compared with 2019-2020 year wages, and gross receipts showing impact from COVID-19.
Employers should also keep in mind that these documents may need to be available upon audit at a later date. Therefore it is important for employers to retain accurate documentation of these closures and declines should they choose to pursue an ERC credit.
Complete IRS Form 5884
In order to file for the Employee Retention Tax Credit (ERTC), employers must request the credit by filing IRS Form 5884, also known as Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Wages. Employers may claim the ERTC on quarterly employment tax returns or they may amend previously filed quarterly employment tax returns. In order to amend a previously filed quarterly return, employers must file form 941-X with their supporting documents and a written statement specifying the amount of ERTC being claimed.
Form 5884 provides guidance on claiming the credit by outlining eligibility criteria, providing instructions for calculating the amount of credit available, and outlining how to record this information in form 5884-C: Work Opportunity Tax Credit. To be eligible for ERA requirements employers must have been in business between March 13th, 2020 through December 31st, 2021 and experienced an economic hardship because of Covid-19 related closures or government orders driving down their revenues. Additionally employers must have kept employees on payroll instead of furloughing them; kept salaries consistent; or brought back furloughed employees that had not already been terminated from employment prior to February 29th, 2020.
As per IRS guidelines there are two parts comprising section A of Form 5884 that outline amounts for paid leave wages (Part 1) and qualified health plan expenses allocable to excluded employer leave wages (Part 2). For each quarter that an employer claims the tax credit they are required to provide details of all wages paid and qualified health care expenses incurred during that quarter separately in section A which will total up in Part 3 at will create total eligible wages reported in Part 4. To calculate the maximum potential amount of employee retention credits allowed under appropriate provisions employers are required to input all qualifying data into worksheet 1 provided within Form 5884 as well as prepare any other applicable paperwork such as proof they have met existing laws governing employee wages and benefits at all times during this period.
Once these steps are completed form 941-X can be submitted after signing off field 11b with relevant supporting documentation indicating how much ERC is being claimed against which quarters therebyfinalizing claim process officially.
File IRS Form 5884 with your tax return
Filing for the Employee Retention Tax Credit (ERTC) is easy and should be done as part of your normal tax return preparation. You need to fill out IRS Form 5884 and submit it with your return. To get the credit, you must complete the following steps:
- Gather the necessary information:
- A copy of the Certification from your State workforce agency confirming that you are eligible for ERTC
- Qualified wages and health care expenses for each employee for which you claim a credit
- Wages paid between March 13, 2020 and Dec 31, 2020
- Calculate the amount of your credit using Form 5884. You can use this form to figure out both the wage and health care portions of the credit separately or in total depending on what is applicable to you. Your qualified health care expenses must be deducted first from any wages paid before any credit can be taken for wages paid.
- Submit Form 5884 with your tax return either electronically or by mail depending on how you normally file taxes. Make sure that all required documentation is attached in PDF format.
- Receive approval from IRS depending on processing time.
- Deposit check (if applicable) into business banking account.
Once completed, review these steps with a certified accountant or tax professional before submitting so that there are no errors in filing or calculating credits due or taxable income due to changes in laws or regulations related to ERTC eligibility since previously filed taxes were completed last year prior to March 13th, 2020 deadline set forth by Congress when passing CARES Act relieved employers who retained employees during pandemic affect unemployment status brought on by Pandemic conditions caused by Covid19 virus in 2020 calendar year lasting until date tentatively set as twelve months after being declared an issue from ordinary seasonal flu such as typical colds strain viruses causing yearly illnesses each year around same seasons during calendar year globally.
Tips for Claiming the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is designed to help employers who have been impacted by the economic fallout from the COVID-19 pandemic. It is a refundable federal income tax credit of up to $5,000 per employee for wages paid from March 12, 2020 to January 1, 2021.
This article will provide tips for claiming the ERTC, including information on eligible employers, how to calculate the credit, and more.
Understand the various rules and regulations
In order to be eligible for the employee retention tax credit, employers must understand the various rules and regulations surrounding it. For instance, employers who received a loan under the Paycheck Protection Program (PPP) cannot claim the employee retention credit. Additionally, all wages used to calculate this credit must be paid after 3/12/2020 and before 12/31/2020.
In order to qualify as an eligible employer, companies must meet one of two criteria:
- Their business operations were fully or partially suspended during any calendar quarter in 2020 due to government orders related to COVID-19; or
- They experienced a significant decline in gross receipts. According to guidance from the Internal Revenue Service (IRS), an employer has experienced a significant decline in gross receipts for a calendar quarter when their gross receipts are less than 80% of what they were for that same quarter in 2019.
Additionally, certain entities such as certain foreign corporations, partnerships without employees and tax-exempt organizations are not allowed to take advantage of this tax credit. Employers will need to also understand any limitations based on their industry type as well as other state or local regulations that could impact their ability to file for this relief measure. Understanding these various rules before filing is key to taking full advantage of this benefit offered through the CARES Act.
Make sure to keep accurate records
Before filing for the Employee Retention Tax Credit, it is important to ensure that accurate records of all pertinent information are kept. This includes information such as business payrolls and expenses, wages paid during the tax credit period and how many full-time employees were employed at the beginning of the year.
These records need to be kept so that they can be used to calculate the amount of eligible wages paid, identify which quarters you are eligible for the employee retention tax credit and prove why a business was impacted by COVID-19. When calculating eligible wages paid, make sure that only qualified employees who meet eligibility requirements for ERTC are included in the computation.
As long as your business has proper documentation, claiming the employee retention tax credit should be an easy process.
Seek help from a tax professional if needed
If you’re having trouble understanding the process of claiming an employee retention tax credit, don’t hesitate to reach out for help. Experienced tax professionals are ready and willing to provide guidance, so contact one that is familiar with this type of filing. Whether you use a CPA, tax lawyer, enrolled agent or other qualified individual, they can help you ensure that the correct information is included and submitted in a timely fashion.
These professionals can also provide advice on whether your business may be eligible for other government relief programs if your business has been heavily impacted by the COVID-19 pandemic. The Economic Impact Payment (EIP) offered in 2020 provides many employers with cash grants as well as other credits and deductions available depending on what type of company you are operating. Taking advantage of these available resources may help alleviate some of the financial burdens facing businesses due to current economic hardship.