Contents
Introduction
Employers across the United States have been faced with unique financial challenges due to the COVID-19 pandemic. The Employee Retention Tax Credit (ERTC) was created in response to help employers financially support their employees and avoid layoffs during this trying time. This article provides an overview of how the ERTC can help employers, how it is determined, and how it gets paid out.
The ERTC is designed to provide a refundable tax credit against certain employment taxes equal to 50 percent of qualified wages that employers pay to employees after March 12, 2020, and before January 1, 2021. To be eligible for the ERTC, an employer must have been shut down due to COVID-19 or experienced a significant decline in gross receipts of over 50 percent during a quarter compared to the same quarter in 2019.
Qualified wages for purposes of calculating an employer’s ERTC are wages paid up to $10,000 per employee for all calendar year quarters. Qualified wages do not include amounts taken into account by the employer when determining its credits under other portions of the Internal Revenue Code such as Employee Social Security Taxes and Medicare Taxes or amounts taken into account as income by nonresident aliens under Sections 871(b)(2) or 877(b)(2) or similar provisions.
To receive payment of the credit, employer’s must fill out IRS Form 941 each quarter with information regarding their gross receipts and qualified wages eligibility before filing Form 941-X along with proof that they are hourly employees who were laid off due to COVID-19 emergency orders – including verbal statements from their employers acknowledging them as such – within three months of becoming eligible for the ERTC . Once approved by Internal Revenue Service (IRS), employer’s will be able claim their tax refund based on which portion of past periods each person was employed along with other relevant data required for IRS regulations on Form 941.
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a 2020 tax credit available to employers in the U.S. that have experienced a certain amount of economic hardship due to the COVID-19 pandemic. It is designed to provide an incentive for employers to retain employees during this difficult time.
In this article, we’ll explain what the ERTC is and how it gets paid.
Eligibility Requirements
The Employee Retention Tax Credit (ERTC) was a tax credit provided as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was designed to provide businesses with some financial relief during the coronavirus pandemic and its economic fallout. The ERTC provides eligible employers with a tax credit for each employee retained and paid during the pandemic.
To be eligible for the ERTC, businesses must have been carrying on business for at least one full year prior to the beginning of 2020 and have experienced either a full or partial suspension of operations due to governmental orders related to COVID-19 or an overall decrease in gross receipts of more than 50 percent compared to the same quarter in 2019.
Additionally, an employer is only eligible if:
- It has an average number of full-time employees (FTEs) of fewer than 500 FTEs in calendar year 2020;
- It meets certain requirements regarding wages paid while operations are suspended or gross receipts are declined; or
- Its business is part of one or more designated industries specified by SBA Form 4506T.
The employer’s qualified wages also must not exceed certain amounts per employee—$10,000 total per employee per calendar quarter in wages that are eligible for the credit, not including amounts reimbursable under any Paycheck Protection Program loan forgiven under Section 1106(b) of the CARES Act.
Credit Amount
The Employee Retention Tax Credit (ERTC) is a refundable tax credit designed to help businesses that have been severely impacted by the COVID-19 pandemic. The credit provides a much-needed financial relief to companies, allowing them to help keep their staff employees and make payroll. The amount of the credit is equal to 70% of qualified wages paid by an eligible employer between March 12, 2020 and Jan. 1, 2021.
To be eligible for the ERTC employers must meet one of two criteria:
- The business was fully or partially suspended due to governmental orders related to COVID-19; or
- The gross receipts of the business in a calendar quarter were less than 50% compared to the same quarter in 2019.
For qualifying employers, there is no limit on taxable wages per employee or total number of employees taken into consideration for the credit.
For most businesses, employers are able submit Form 941 and IRS Form 7200 for quarterly wage-periods when filing taxes during 2021 in order receive the ERTC throughout 2021. Employers may also submit Form 7200 at any point through March 2021 for retroactive advance payments from approved credits from prior quarters. Pending one’s eligibility, such payments could include credits from late 2020 and early 2021 along with any other missed prior payments due for prior calendar quarters and/or year-end filing (December 31).
How to Claim the Credit
The Employee Retention Tax Credit is designed to help businesses avoid layoffs and keep jobs. The credit is offered by the IRS and can be used by employers to offset their employment tax obligations. The credit is also refundable, meaning that employers can receive a refund if their credit is greater than their employment tax obligations.
In this article, we’ll discuss how employers can claim the credit and how it will get paid out:
- How to claim the credit
- How the credit will be paid out
Claiming the Credit on Your Tax Return
The Employee Retention Tax Credit is a refundable tax credit that can be claimed on your 2020 business income tax return, or on an amended 2019 return.
To claim the credit, you will need to include Form 941-X (Reconciliation of Tax and Wage Information). To complete the form, you’ll need to provide detailed records of all your wages paid and the amount of credits claimed. This form should be filed with your 2020 IRS Form 1120.
You must also provide records of all employee wages and payroll taxes withheld to qualify for this credit and you must provide evidence that you have met the requirements to claim it (i.e., proof that you experienced a partial shutdown due to a governmental order or experienced a significant decline in one quarter in 2020 over the same quarter in 2019). When filing your taxes, keep in mind that some businesses may be eligible for both the employee retention credit and Paycheck Protection Program loan forgiveness; businesses should check both banks for eligibility requirements before making any decisions about which credits or loans to pursue.
Claiming the Credit Through the Payroll Tax Process
Each quarter, employers can reduce federal payroll tax deposits by the amount of the Employee Retention Tax Credit (ERTC) expected to be eligible to claim. Employers should monitor their available funds throughout the year to ensure that enough deposits are available for payment of these and other taxes.
The final step is to file Form 941, or Employer’s Quarterly Federal Tax Return, for each quarter. On Form 941, the employer must indicate the amount of ERTC that was claimed for those quarters in which it applied. The ERTC is then refunded to the employer as a tax deposit or overpayment on their Form 941 or when filing their annual income tax return.
If you’re using a payroll provider that files your quarterly Forms 941, they should be able to assist you in claiming your ERTC when filing your return. If needed, an accountant can also advise you on how best to claim this credit based on your particular situation.
How is the Credit Paid Out?
The Employee Retention Tax Credit is a tax credit that can be claimed by employers who have been financially affected by the COVID-19 pandemic. This credit can be claimed as a refundable payroll tax credit, meaning that employers may be able to receive a refund for any overpayment of payroll taxes. It is important to understand how the credit is paid out in order to determine the best way to claim it.
In this article, we will discuss how the credit is paid out:
Direct Payment Option
A qualifying employer may elect to claim the Employee Retention Tax Credit as a direct payment from the IRS. After completing Form 941, the employer will request a direct payment from the IRS equal to their calculated Employee Retention Tax Credit. The direct payment is processed within 21 days of the form being submitted. If an employer files for an employee retention tax credit within 2 months of their quarterly filing deadline, they may choose to receive a refund check by mail instead of a direct payment.
The calculation of taxable wages and corresponding tax credits differs if an employer elects to take advantage of this direct payment option. In lieu of claiming employee wages on quarterly Form 941, employers participating in this program may base their calculations on eligible wages paid or incurred during any calendar quarter. This allows employers more freedom in when they pay taxes and therefore allows them to get funds back faster than through traditional filing methods.
Employers must be aware that there are several requirements that need to be met in order for them to qualify for this program, including:
- Having 500 or fewer employees when aggregated with other categories
- Being affected by COVID-19 related business closure orders or reductions in services due to COVID-19 concerns
- Paying certain qualified wages between March 13th, 2020 and January 1st, 2021.
Further information about who qualifies for this program can be found on the IRS website.
Tax Credit Reduction Option
Under the Tax Credit Reduction Option, employers that take advantage of the credit can choose to reduce what they must pay in Social Security payroll tax. The employer will reduce the total amount of its 6.2 percent Social Security tax and claim the equivalent amount as a credit for its federal payroll taxes for the year. Employers that opt for this option must inform their payroll provider of the reduced amount to withhold.
Alternatively, employers can also choose to be reimbursed by filing Form 941-X or amend Form 941, Employee’s QUARTERLY Federal Tax Return, with their IRS-issued employer identification number (EIN), employee information, payment details and other required information. Reimbursement can only be issued from the last day of each quarter and up to three years after incurring qualified wages and costs related to providing healthcare benefits.
Conclusion
In conclusion, businesses that are eligible for the Employee Retention Tax Credit can use it to offset some or all of the wages they pay to their employees. The credit has a maximum of $5,000 per employee and can be employed in one of two ways: by claiming it on a quarterly basis as part of their regular payroll filing, or by claiming it as part of their annual tax return.
Employers should determine their eligibility for the credit and whatever amount is due – if any – in consultation with an accountant. By doing so, employers will be able to take full advantage of this valuable program.