Contents
Overview
The Employee Retention Credit (ERC) is a refundable tax credit that provides up to $5,000 per employee over a two-year period. This credit was established as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act to help companies that were affected by the pandemic.
If you’re considering taking the ERC, it’s important to understand how to report it on your tax return and how it affects your tax bill. Let’s break it down:
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable tax credit against certain employment taxes equal to 50% of qualified wages an eligible employer pays to employees after March 12, 2020 and before January 1, 2021. The credit is designed to help employers that are financially impacted by the coronavirus pandemic to continue paying employees during the crisis.
To be eligible for the Employee Retention Credit, an employer’s operations must have been partially or fully suspended due to a governmental order related to COVID-19, or the employer’s gross receipts in a calendar quarter must be less than 50% of their gross receipts for the same calendar quarter in 2019. This means that an employer may qualify for the credit even if it has not been mandated to close its doors.
In addition, eligible employers must have fewer than 500 full-time employees as of December 31st, 2019. Those employers with greater than 500 full-time employees as of December 31st, 2019 can also qualify by excluding all full-time workers hired after March 13th, 2020.
- The maximum amount of wages taken into consideration when calculating ERC amounts cannot exceed $10,000 per employee on a quarterly basis (or $5,000 per employee on a quarterly basis).
- The maximum ERC that an employer can take is $5 million which includes any combination of qualified wages and health plan expenses paid between March 13th 2020 and December 31st 2020 per quarter for all five quarters in calendar year 2020 ($14 million total).
The Form 941 Employer’s Quarterly Federal Tax Return contains four parts: Employee Wages and Taxes; Taxable Social Security Wages; Taxable Medicare Wages; and Qualified Retention Credit Electing Eligible Employers. Employers who elect to receive the ERC should fill out Part 2C Qualified Retention Credit Electing Eligible Employers when filing their Form 941 with the IRS each quarter in order to claim this credit.
Eligible employers
Eligible employers are businesses with 500 or fewer employees that receive an economic hardship due to the Covid-19 virus. Eligible employers must have had operations partially or fully suspended due to an order from a governmental entity related to the coronavirus, or experienced a significant decline in gross receipts. Self-employed individuals may also qualify if they meet certain requirements.
The employee retention credit is not available for tax-exempt organizations, such as public charities and religious institutions, unless they are classified as Code Sec. 501(c) (8), (9), (17) or (20) organizations. If a business receives a Paycheck Protection Program loan, generally, it cannot claim the employee retention credit based on wages paid with funds from such loans.
In calculating an employer’s eligibility for the employee retention credit related to wages paid between March 13 and December 31, 2020, all persons treated as a single employer under Internal Revenue Code Section 52(a) are taken into account when determining whether the employer has an average of 500 or fewer employees whose wages must be included in payroll tax filings filed with Social Security Administration during 2019 – 2020 calendar year. Provisions may apply that allows certain employers that were not in existence throughout calendar year 2019 disregard wages shown on their payroll returns when determining average number of employees employed during their 2020 calendar year.
It is important to note that employers affected by the Family First Coronavirus Relief Act Credits cannot take advantage of two credits at the same time; they must choose one or the other but not both.
Claiming the Credit
The Employee Retention Credit is a great way to receive tax relief for businesses that have been affected by the COVID-19 pandemic. The credit can help offset the cost of wages and health insurance for employees. It’s important to know how to claim the Credit when it comes time to file your taxes.
We’ll go into detail about the steps and requirements that you need to meet in order to claim the Employee Retention Credit:
Calculating the credit
To calculate your Employee Retention Credit, you first need to identify the average number of full-time employees for either the 2019 or 2020 calendar year, depending on whether you are a business that was fully or partially shut down due to COVID-19 related orders. Once the number is established, the credit is equal to 50% of qualified wages up to $10k per employee (up to a maximum credit of $5k for each employee). Qualified wages are generally capped at wages paid in excess of $10k and health insurance costs.
For certain employers who use a fiscal year, such as non-profit organizations or agricultural employers under certain conditions, they can utilize an alternate calculation that allows them to use the average number of full-time employees per quarter instead. Special unemployment tests may apply in those cases as well. All employer credits must be claimed on Form 941 and any credits which exceed payroll taxes can be refunded upon filing.
How to claim the credit
The Employee Retention Credit (ERC) was established by the Coronavirus Aid, Relief, and Economic Security Act in March of 2020 to help employers keep their full-time employees on payroll during the COVID-19 pandemic. The credit is a fully refundable tax credit against employment taxes equal to 50 percent of qualified wages paid up to $10,000 per employee, with a maximum of $5,000 per employee.
When it comes time to claim the credit on your tax return, you will begin by filling out Form 941 filed by employers quarterly. Business owners and their tax preparers will computate total qualified wages paid for each calendar quarter that may be eligible for the ERC based on averages from prior quarters, taking into consideration salary changes or employment levels.
You’ll then need to report Form 941 and enter contents in various schedules attached to the form which will reflect wages for ERC eligibility along with any advances received under the program and total credits claimed per quarter. You can also take advantage of other potential benefits including operation of net operating loss or generation of excess payroll credits that can be used at a later date when filing your taxes.
It is important to note that if you receive an advance payment from Treasury you must reduce your claim for credits otherwise deemed eligible when filing Form 941. After completing this form you will use Schedule R (Form 941) which is used by employers claiming refundable credits including the ERC should detail entry changes and computate amounts available for each quarter.
In summary it’s important to accurately calculate amounts eligible for ERC before claiming a refundable credit when filing Form 941 along with necessary documentations pertaining to amount owed versus any advancement received from Treasury.
Reporting the credit on your tax return
When you claim the Employee Retention Credit (ERC), you will need to report it on your tax return. This process is simple, but it’s important to make sure you are doing it correctly and that you keep all relevant documents in case of an audit. There are three main steps to claiming the credit:
- Calculate how much credit you are eligible for. You should total the amount of wages paid to all employees during the period of time eligible for the credit. Generally, this includes wages paid between 3/12/20 and 12/31/2020, but be sure to check the specific requirements in the IRS guidelines.
- Report the credit on Form 941, 943, or 944 – depending on your business’ filing schedule and other factors – as well as submitting IRS Form 7200 with your return. Be sure to include any related documents such as payroll records for employees affected by partial or full closure during this period of time in order to back up your information and get full approval for your claim quickly and correctly.
- After completion of Form 7200, employers can either receive advanced payments from their Employer’s Quarterly Federal Tax Return (Form 941) or wait until filing their annual return (Form 944). If employers choose advanced payments from their Employer’s Quarterly Federal Tax Return they must also fill out form 1041-Y (Request for Information RegardingYour Qualified Liabilities) which allows them to skip filing Form 7200 entirely since advanced payments are considered “qualified liabilities” as defined by ERC guidelines.
By following these steps carefully and recording all relevant documents needed when claiming ERC benefits will ensure that employers don’t face a potential audit while ensuring they receive all eligible funds quickly and correctly.
Required Documentation
When filing your taxes, there are certain documents you must include in order to be eligible to claim the Employee Retention Credit. It is important to ensure that you have the correct paperwork and understand the requirements in order to successfully apply for the credit.
In this article, we will discuss the kinds of documents you will need to provide to the IRS in order to claim the Employee Retention Credit:
- Proof of Eligibility
- Employee W-2 Forms
- Payroll Tax Returns
- Employee Termination Notices
- Payroll Records
- Payroll Tax Statements
Documentation needed to support the claim
Employers must provide the necessary documentation to support their claimed wages and tax credits when filing an IRS Form 941. Documentation must include:
- Detailed evidence as to how the amount of qualified wages claimed was calculated. This should include records such as payroll tax filings, salary or wage payments, and any applicable health plan expenses incurred;
- Details of the employees who were included in the calculation of qualified wages. This may include proof of employee furloughs, job offers, or other types of financial assistance;
- Proof that all retained employees were employed for at least 31 consecutive days during 2021;
- Documentation confirming eligibility for the retention credit;
- An attestation from an authorized officer confirming that all information provided is accurate and supporting statements are true, correct and complete.
Examples of documents to provide
The Employee Retention Credit (ERC) includes tax incentives for employers to keep employees on their payroll. Depending on your employment status and past use of payroll tax credits, the ERC has different eligibility requirements. To take advantage of the ERC, employers must provide evidence that they are eligible to take it and certify their eligibility.
Examples of documents employers should provide include:
- Records showing wages paid to employees in 2020.
- A copy of the 2019 Form W-2 filed with the Social Security Administration.
- A copy of Forms 941 or equivalent informational forms that show federal employment taxes reported by you in 2020.
Employers should also consult their local state laws and regulations to determine if they must provide additional documentation in order to qualify for additional credits or benefits related to state withholding information.
In addition, employers must also include documentation verifying any applicable emergency leave payments taken at any point during 2020 as well as documentation verifying FFCRA emergency sick leave credit amounts used during 2020 as tax deductions on Forms 941 prior to filing for the ERC.
Finally, since some businesses may have ceased operations due to government restrictions being issued under health emergency declarations related to coronavirus disease 2019 (COVID-19 contagious disease), including closure orders by government authorities or recommended practice by governmental organizations, those businesses must retain copies of such closures or directives from a governmental entity as part of their records for verification purposes when filing for an ERC cleanup credit.
Additional Resources
Understanding which tax credits are available to your business and how to report them on your tax return can be challenging. The Employee Retention Credit (ERC) is a tax credit created in response to the Coronavirus pandemic that is available to certain employers who were affected by the pandemic.
To ensure you take full advantage of this credit and report it correctly on your tax return, it is important to seek out additional resources.
IRS website
The Internal Revenue Service (IRS) website, http://www.irs.gov, is an excellent resource when trying to report the employee retention credit on your tax return. This website provides details about the credit, eligibility criteria and an overview of how to calculate and claim the credit. The site also offers FAQs that can answer questions you may have or provide details not included in this guide.
Additionally, the IRS website has links to additional resources outside of their own organization that can help you understand even more about this new tax benefit for businesses. It is important to be aware of all available resources when completing your taxes and this website can help you make sure that you are making the best decisions for your business.
IRS Tax Tip 2021-21
The Internal Revenue Service has released Tax Tip 2021-21 to help taxpayers understand how to take advantage of the Employee Retention Credit (ERC) this tax season. The Employee Retention Credit was put into effect as part of the recent stimulus package, providing employers with a refundable 50% credit for amounts paid to employees between March 12, 2020 and December 31, 2020.
To receive the credit, employers must have been financially affected by COVID-19 such as experiencing reduced revenue or operations being suspended due to stay-at-home orders. Self-employed individuals and nonprofit organizations are eligible for the credit if they meet certain criteria. Employers are also eligible through ERM PAYROLL REPORTING FORM.
Taxpayers should be aware that this is a refundable tax credit that results in a direct dollar-for-dollar reduction in tax liability on their federal income taxes. The maximum amount of this credit is $5,000 per employee per quarter for up to five quarters total for those qualified businesses. Furthermore, taxpayers who have already filed their tax returns can expect an updated calculation sheet after April 10th 2021 as guidance from the IRS becomes more clear on how business owners can report ERC when filing taxes for prior years in 2021.
In addition to federal guidance from Tax Tip 2021-21, it is important to keep up with COVID related legislation passed both at the state and local levels which may impact business owners’ eligibility or relief funds availability when claiming ERC credits or other type of benefits like followup funds available in subsequent aid packages during 2021 and beyond. Therefore business owners should:
- Contact their professional advisor.
- Look online for further resources related to grants and aids that may be offered by your local government offices during your state’s 2021 fiscal year period.
IRS Form 5884-C
If you are eligible to receive the employee retention credit, you will need to fill out IRS Form 5884-C. This form is used to figure out the amount of qualified wages that each employee is entitled to receive. It also contains information about how the retention credit will be reported on the employer’s income tax return and any other forms that need to be filed in conjunction with it.
To get started with IRS Form 5884-C, you should first refer to IRS Notice 2020-22, which provides detailed instructions on how and when eligible employers can claim the credits. After reading through this publication, employers will be ready to fill out Form 5884-C properly according to their individual circumstances.
Employers should read carefully through all sections of Form 5884-C before completing it and make sure that all required information is included. Once complete, the form needs to be submitted with the employer’s income tax return for the applicable quarter or year. The employee retention credit can only be claimed by an employer once per taxable year so it is important to understand when eligibility has been met before attempting a claim on this form.
By taking time now to review information related to IRS Form 5884-C and understanding eligibility criteria, businesses can maximize their potential savings by claiming all credits they are due under relevant regulations or laws. Additional resources related specifically to calculating employee retention credits include:
- Online calculators
- Webinars
- Publications from industry sources such as highly rated Paychex tax advisor services.