Contents
Introduction
The Employee Retention Tax Credit is a tax incentive provided by the federal government to eligible businesses in order to help them get back on their feet after the devastation of COVID-19. This credit is provided to employers who have been significantly affected by the pandemic and have kept their employees employed, or rehired laid-off employees.
The tax credit is calculated by taking into account the amount of wages paid to each employee, as well as other factors such as payments for health coverage and certain employer-provided time off (such as family and medical leave), that have been made in 2020. To be eligible for this credit, employers must meet specific criteria such as offering health coverage for employee’s entire 2020 Calendar Year, having either experienced a full or partial suspension of operations due to government orders related to COVID-19 or experienced a significant decline in gross receipts year over year in any calendar quarter compared to 2019.
For those eligible employers that may qualify, they can calculate their Employee Retention Tax Credit using either:
- 1) the Form 941 method (generally applicable if an employer pays fewer than 500 employees combined within all its locations), or
- 2) the aggregated group method (generally applicable if an employer pays 500 or more employees combined within all its locations).
Once employers calculate the amount of eligible wages and associated forms (Forms 940 & 941, etc.) they may use those documents when filing with IRS Form 7200 for their tax return. Please note that details on calculating qualified wages are based on federal regulations providing direction on this topic, which are subject to change; thus it’s important to stay up-to-date with any new guidance from law makers.
Eligibility Requirements
Employee Retention Tax Credit (ERTC) is a tax credit available to employers to help them retain their employees during the COVID-19 pandemic. To be eligible for the credit, employers must meet certain requirements. In this section, we will discuss the eligibility requirements for the ERTC and how it is calculated.
Employee Eligibility
The Employee Retention Tax Credit (ERTC) is a refundable payroll tax credit for eligible employers that are experiencing financial hardship due to the COVID-19 pandemic. Eligible employers can receive a fully refundable payroll tax credit of up to 50% of qualified wages paid from March 13, 2020 through December 31, 2020.
To be eligible for the ERTC, an employer must meet certain requirements.
Employee eligibility:
To qualify for the ERTC, employees must meet two criteria:
- Their services were impacted due to a full or partial suspension of operations as a result of governmental order related to COVID-19 during any calendar quarter; OR
- They had gross wages below a certain amount during either the calendar quarter in which their services were impacted or the prior calendar quarter.
Employee wages also must meet certain requirements:
- Both full-time and part-time employees are eligible – their wages count toward an employer’s total qualified wages.
- In general, only “qualified wages” paid between March 13, 2020 and December 31, 2020 are eligible for the credit; however certain other “nonqualified” health plan expenses related to these qualified wages may be eligible for the ERTC as well.
- Eligible employers can claim up to $5,000 per employee in qualified wages per year – including healthcare costs such as insurance premiums – that are paid from March 13 through December 31 of 2020 as part of this tax credit.
Business Eligibility
In order to qualify for the Employee Retention Tax Credit, businesses must meet certain criteria. The business must have been carrying on a trade or business in 2020, and it must have either partially or completely suspended its operations due to COVID-19 or seen a significant decline in gross receipts as compared to the same quarter in 2019. To qualify for the credit, businesses with over 500 full-time employees will only be eligible if they completely ceased business operations, while businesses with fewer than 50 full-time employees can qualify if a decline of either 25% or more is experienced between April 1 and December 31 of 2020 as compared to 2019.
In addition to these Congressional requirements, there are several more restrictions that may further restrict eligibility for the credit. Employers that received any type of loan from the Paycheck Protection Program, advance emergency sick leave or emergency family medical leave credits are ineligible for this credit unless they are enrolled in the refundable tax credit process program. Additionally, employers with affiliated companies must look at total number of full-time equivalents across all affiliated entities collectively when determining eligibility requirements.
Calculation of Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help employers keep their employees on the payroll during the COVID-19 pandemic. Employers can claim the ERTC if they meet certain criteria, and the amount of the ERTC is based on a calculation.
Let’s explore how to calculate the ERTC:
Calculating Qualified Wages
The Employee Retention Tax Credit (ERTC) is an incentive program administered by the Internal Revenue Service (IRS). It is designed to provide businesses with financial relief for employee wages that were paid out between March 13, 2020 and January 1, 2021. This credit of up to $5,000 per employee applies to the qualified wages paid by a business—including full-time and part-time employees— in response to the government’s Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.
To calculate qualified wages under the ERTC an employer must meet two requirements. First, they must have seen either a full or partial suspension of their operations due to a government order since March 12th. Secondly, they must have experienced or anticipate a significant decline in gross receipts when compared year over year.
Qualified wages are calculated differently depending on company size; employers with fewer than 100 full-time employees should refer to the calculation outlined by section 4003(b)2(a)(1). Under this formula qualified wages refer to those paid between March 13th and December 30th of 2020 that do not exceed $10,000 for each employee considered eligible for the ERTC. Employers with more than 100 employees will base their calculations off section 4003(b)2(a)(2) and can include wage payments up to $20,000 per employee.
It is important for employers to note that total wages paid prior to March 12th are not eligible for ERTC calculation—only those which occurred subsequent will count towards the credit’s value. Additionally, health plan costs related to these qualified wages are not subject for consideration as part of this program’s tax credits or deductions as outlined under section 4003(c).
Calculating the Credit Amount
The Employee Retention Tax Credit (ERTC) is a refundable federal income tax credit available to eligible employers for retaining employees and maintaining payroll during periods of economic hardship, such as during the COVID-19 pandemic.
Employers are eligible for the ERTC if their business:
- Faced fully or partially closure due to government rules or regulations imposed due to COVID-19, OR
- Experienced a significant decline in gross receipts compared to the same quarter in the prior year.
Employers are eligible for a credit equal to 50% of qualified wages per employee per quarter (up to $5,000 total), including health plan expenses. Calculation of the ERTC is done using worksheets provided by the Internal Revenue Service (IRS) on their website. These worksheets allow employers to compute their credit trades based on all applicable factors (for example – employee wages, number of full-time employees, etc.) as well as any carryover amounts from prior quarters.
Employers must keep detailed records and supporting documents when filing an ERTC claim. Additionally, employers must submit Form 941 Quarterly Tax Return using specific lines with information that was used to calculate their tax credit amount on the worksheet provided by IRS.
Limitations on the Credit
Employers are limited to the amount of ERTC credits they can receive for each employee. The total credit allowed for wages paid in a quarter and for any employee cannot exceed $5,000 ($10,000 maximum for multiple quarters). Additionally, the credit is not allowed if the employer or affiliate received a loan under the Paycheck Protection Program (PPP) unless certain requirements are met.
The amount of eligible wages taken into account when calculating the tax credit will be reduced by:
- Amounts that were used in prior quarters to calculate an ERTC
- Any amounts taken into account to calculate an employee retention payroll tax credit on before January 1, 2021
- Any amounts that were excluded from wages as qualified sick leave and qualified family leave wages (under sections 7001 and 7003 of the Families First Coronavirus Response Act), as well as employer contributions to health plans with respect to such exclusion wages
- Any amounts paid with respect to which a refund or payment was received from any federal, state or local program established in response to COVID-19 related purposes
Conclusion
In conclusion, the Employee Retention Tax Credit is an important tax benefit that can help employers offset the cost of keeping their employees on board during periods of economic hardship. To calculate it, employers must first determine the amount of qualified wages they have paid to employees during all or part of the calendar quarter in which the credit applies and divide that amount by 6.5. They should then apply any limitations based on their 2019 and 2020 wages and, if eligible, claim the tax credit for up to 70 percent of their covered wages for each employee for each quarter.
Understanding how to calculate and claim this valuable tax credit can enable employers to maximize cost savings during hard times. It also allows them to remain competitive and retain key employees who are essential assets in a company’s success.