Contents
Introduction
The Employee Retention Tax Credit (ERTC) is a refundable tax credit that incentivizes businesses to keep employees on the payroll during COVID-19. It provides relief to employers by providing a refundable tax credit equal to 50% of qualified wages paid after March 12, 2020 and before January 1, 2021.
The ERTC is part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). It was designed to provide financial support for businesses who have continued operating despite the difficulties created by the COVID-19 pandemic. Employers who qualify for the ERTC can receive up to an amount of $5,000 per employee in tax credits for wages paid in 2020. In order to qualify for this credit, certain requirements must be met:
- The employer must have experienced full or partial suspension of operations due to government orders related to COVID-19 OR
- Significantly reduced gross receipts in a calendar quarter relative to 2019 AND
- Continuous employment of an eligible employee
Eligibility Requirements
The Employee Retention Tax Credit is a program that aims to help businesses who have been affected by the coronavirus pandemic. To qualify for the credit, businesses must meet certain eligibility requirements. These requirements include:
- Having experienced a full or partial suspension of operations or a significant decline of gross receipts from the same period in the previous year.
- Having paid wages to employees during the impacted period.
A more in-depth look at the requirements for eligibility will be discussed in this heading.
Employer Qualifications
The Employee Retention Tax Credit (ERTC) provides a payroll tax credit to employers facing economic hardship due to COVID-19. The ERTC is available to employers regardless of size, as long as they are not federal, state or local governments or their instrumentalities.
In order to qualify for the ERTC credit, the employer must match any two of the following three criteria:
- Had operations fully or partially suspended by governmental orders due to COVID-19; OR
- Experienced a decline in gross receipts of greater than 50% when compared to the same quarter in 2019; OR
- Have fewer than 500 employees for 2020.
It’s important to note that if an employer has more than 500 full-time employees, they may still qualify by using a method based on employee headcount limitation (i.e., a per location consideration test). For example, an employer with 600 employees may qualify if each location has fewer than 500 FTEs and they meet one of the other two criteria listed above.
Employee Qualifications
In order to qualify for the Employee Retention Tax Credit, a business must have experienced either a full or partial suspension of their operations due to governmental orders related to COVID-19 or have experienced significant declines in revenues in 2020.
The business must have in place a plan to retain its workforce and not reduce the employee’s wages below the required threshold. To be eligible for this credit, an employee must meet all the following criteria:
- Employed by a qualified employer
- For whom the employer paid wages at any time during the calendar year
- Did not receive compensation that exceeded certain thresholds ($10,000 per month or $120,000 annually)
- Not been terminated (summary: involuntary termination) by December 31, 2020
Additionally, employees whose wages were reimbursed under certain state waivers will not be eligible; however employers may still claim tax credits for reimbursement paid on behalf of those employees. Employers are also not eligible to claim credits associated with salary payments they made while they were exempt from federal payroll taxes due to participation in the Paycheck Protection Program and EIDL Advance program.
Eligible Wages
In order to be eligible for the Employee Retention Tax Credit (ERTC), an employer must have had wages paid by them during the period beginning on March 12, 2020 and ending on December 31, 2020. Employers must have met certain revenue conditions to be eligible for the credit. For example, employers whose revenues in any calendar quarter of 2020 decreased by more than 50% compared to the same calendar quarter in 2019 are eligible for the credit.
The amount of wages taken into account for determining eligibility is limited to the first $10,000 of qualified wages per employee in a taxable year. Wages that do not qualify for this are ones that were already reimbursed or disregarded under other CARES Act programs such as Paycheck Protection Program (PPP). As long as an employer pays qualified wages before January 1, 2021, they can still receive the ERTC credit even if they began paying it after December 31, 2020.
Wages used to calculate eligibility must have been actually paid during one or more of the taxable years between March 12th through December 31st and their payment should not be deferred beyond this time period in order for them to qualify as a “paid wage” under ERTC requirements. Wages paid during designated pay periods within a given taxable year will also count towards eligibility even if those payments may extend across multiple taxable years as long as they are issued within timeframes corresponding with those pay periods and do not push past December 31st. It should be noted that payroll taxes associated with these wages will not count towards determining eligibility due to their separate reporting process from IRS Form 941s where these amounts can only be reported after being withheld from employee paychecks or when deposited through electronic funds transfer (EFT).
Calculating the Credit
The Employee Retention Tax Credit (ERTC) offers eligible employers a refundable tax credit to help offset the cost of keeping employees on payroll during the coronavirus pandemic. To qualify for this credit, employers must calculate their average number of employees in 2020 and compare it to their average number of employees in 2019. Additionally, employers may have to factor in wages paid in 2020 and other criteria.
In this section, we will delve into the process of calculating the ERTC:
Qualified Wages
One of the criteria for determining whether you are eligible to receive the Employee Retention Tax Credit (ERTC) is the amount of qualified wages and health care costs paid to employees. To qualify, individual wages must be paid between March 13 and December 31, 2020.
Qualified Wages are the wages subject to Federal Insurance Contributions Act (FICA) tax or Railroad Retirement Tax Act. These expenses include salary, vacation pay, and wages for qualified leave taken under the Family Medical Leave Act (FMLA) or Emergency Paid Sick Leave created by certain COVID-19 legislation. Qualified Health Care Costs includes those that would be deductible if not accounted for in FICA taxes – including employee health premiums delivered through a separately identifiable paycheck plus 50 percent of employer-side Medicare taxes imposed on all employee tips paid by employers over $2,500 during the taxable year.
Eligible employers must then add up all qualified wages & health care costs paid by them from March 2nd 2020 until December 31st 2020 to determine whether they meet either one or both eligibilty thresholds for ERTC based on average number of full-time employees and wages paid during that eligible period. The credit has a maximum rate of 70% for qualifying wages and an additional credit for 50% of these qualifying health care costs up to $14,000 per quarter per employee ($560/day). This credit can be claimed quarterly on a Form 941 schedule R once an employer reconciles their gross qualifying contributions before filing this record with their quarterly payroll tax return Form 941.
Maximum Credit Amount
The maximum credit amount for each quarter for any qualified business is capped by the definition of a qualified employer. A qualified employer is defined as having gross receipts that are less than 50 percent of their gross receipts for the same calendar quarter in the prior year. The allowable maximum credit to which a qualified employer may be entitled is equal to 50 percent of certain eligible wages up to $10,000 paid per employee on a quarterly basis, aggregated across all quarters in 2021.
Therefore, if you pay employees an aggregate amount that exceeds $10,000 per employee in any quarter then you will only be able to claim a maximum credit amount equal to 50 percent of that amount up to $10,000. For example:
- If an eligible business paid their employees an aggregate amount of $11,000 in a given quarter they would only be allowed to claim a maximum credit equal to $5,000 (50% x $10,000). The remainder would not qualify towards the Employee Retention Tax Credit calculation.
Claiming the Credit
The Employee Retention Tax Credit was created by the federal government to help businesses that have been impacted by Covid-19. If you qualify for the credit, you could get a refundable tax credit for up to $5,000 per employee for every quarter in 2021.
This section will cover the process of claiming the credit and the qualifications you must meet in order to be eligible:
Form 941
Form 941 is a return used by employers to report their quarterly federal income tax withholding, and any related taxes such as FICA tax, Medicare tax, and withheld federal income tax from employee wages. In order to qualify for the Employee Retention Tax Credit (ERTC), employers must meet the requirements of Form 941. Specifically, the employer must have experienced an eligible business hardship during a quarter in which they paid wages to employees. To document this hardship and claim the credit, businesses should use line 24a on Form 941 – “Employee Retention Credit”.
In addition to using line 24a, certain other forms may be required in order to qualify for the ERTC, including:
- Form 7200: Advance Payment of Employer Credits Due To COVID-19
- Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return
- Form 8849: Claim for Refund of Excise Taxes
When submitting the Forms along with Form 941 to claim the ERTC credit, all scheduling lines need to be completed accurately in order for the IRS to process it correctly.
Form 944
Form 944 is the form employers use to report their Social Security and Medicare taxes and withheld federal income tax from employees’ paychecks. Employers must file Form 944 annually to qualify for the Employee Retention Tax Credit (ERTC). This allows employers to claim a credit of up to $5,000 for each eligible employee. To qualify, other criteria must be met such as an eligibility period based on business operations.
The IRS has outlined specific instructions for filling out Form 944 that should be followed carefully to ensure compliance with all regulations. When completing line 1 (Employer identification number), employers should enter the correct federal Employer Identification Number assigned by the IRS. Line 2 (Total wages) requires employers to enter their total amount of wages paid in the current calendar year, before any deductions or credits are taken into account.
Line 3 requests information related to withheld federal income tax, while Line 4 seeks relevant data on Social Security and Medicare taxes due on these wages. On Line 5, employers must enter any prior year’s overpayment that may be credited against taxes owed in the current year; this includes amounts owed from filing Form 941 or Form 945 in an earlier period. Finally, Line 6 is where employers provide their net amount due after computation of withholding taxes and prior year credits have been factored into the equation.
Once completed, F944 can be submitted directly online or via paper filing with the IRS using either certified mail or other approved methods of submission outlined by the government agency.
Form 945
In order to claim and receive the Employee Retention Tax Credit (ERTC), employers are required to fill out and submit Form 945 “Annual Return of Withheld Federal Income Tax.” This form will allow employers to report any tax, penalties, and interest that is owed by their company as a result of the provisions of the Employee Retention Tax Credit.
Form 945 consists of four parts: Part A, Part B, Part C and Part D. In Part A of Form 945, you must list your employer identification number (EIN) as well as any wages paid during the tax year. You should enter only one EIN per return. Part B reports information regarding any deposits made in relation to taxes withheld or paid on these wages including penalties and interest amounts. In Part C of Form 945, you must provide information with regards to amounts deposited or paid in addition to those reported in Parts A and B such as prior year liability adjustments or wage refunds that were issued in relation taxes withheld from employees. Finally, part D is where employers certify that all information provided is complete and accurate before submitting the form for review.
Form 945 should be filed for each calendar year where the employer seeks credit for payments made under the provisions of the Employee Retention Tax Credit offered by Internal Revenue Service (IRS). It should be noted that filing Form 945 does not guarantee that an employer will qualify for ERTC – a review will be held by IRS upon submission of documents which includes a review for application accuracy as well eligibility requirements in accordance with federal regulations surrounding ERTCs.
Conclusion
Once you have determined whether your business meets the requirements of the Employee Retention Tax Credit, you can apply for the refundable credit by filing Form 941. Employers cannot both receive the tax credit and furlough, lay off, reduce hours or wages of their employees. The amount of the credit is equal to up to $5,000 per employee over 2020 and 2021 combined.
Additionally, employers can claim the employer portion of Medicare taxes paid on eligible wages with this form as well. For more information regarding wage requirements for eligibility under this tax credit as well as other help with filing or understanding all components eligible for a refundable credit speak with an accountant or consultant who specializes in tax law.