Overview of Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a tax relief option available to businesses struggling in the wake of the COVID-19 pandemic due to the COVID-19 pandemic. The credit helps business owners offset the cost of employee wages and other costs. Eligible businesses can receive a tax credit of up to $5,000 for each employee for wages paid between March 12, 2020 and January 1, 2021.
This article will provide an overview of the ERTC, including eligibility requirements and how to claim the credit:
- Eligibility requirements
- How to claim the credit
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a credit created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help businesses keep their workforces intact during the COVID-19 pandemic. This federal tax credit is available to employers who endured a partial closure of their business due to government-mandated shut downs or had gross receipts decline 50 percent or more from 2019 levels. The credit helps offset a portion of a company’s payroll costs.
Under the ERTC, eligible employers can claim up to 50 percent of wages paid from March 12 through December 31, 2020 (up to $10,000 per employee). The amounts are expandable depending on how employers use it in conjunction with other tax credits and deductions. Scheduled payments are available for eligible employers that apply as long as they attach IRS Form 7200 – Advance Payment of Employer Credits Due To COVID-19.
Not all employers are eligible for the ERTC; however, many that qualify may not realize it or take advantage of the program. To be eligible, employers must meet certain qualifications related to reduced gross receipts or government shutdowns and fully document their decision making processes and calculations when applying for the credit. Consulting your CPA is suggested when evaluating eligibility for this program.
To qualify for the refundable tax credit, an employer must meet four eligibility criteria:
- Employer’s business must have been affected by COVID-19 in some manner.
- Employers are allowed to claim the credit only when an employee is on their payroll and receiving wages, including paid FMLA and sick leave pay, although employees on furlough do not count toward the employee headcount.
- The employer’s gross receipts in a calendar quarter must decline by more than 20% compared to their gross receipts in the same calendar quarter in 2019 or their gross receipts for 2020 can’t exceed 80% of those reported in the same calendar quarter in 2019.
- The employer must have no more than 500 full-time employees or, if they do have more than 500 full-time employees, they must be part of a group election that consists only of employers with similar business activities under common control, under Internal Revenue code section 414(c). Furthermore, if these employers are part of a single filing entity, such as S Corporations or LLCs , only one ERTC claim may be submitted for that entire entity even though it contains multiple companies operated under common control (the common control test does not apply to such entities).
Employers that meet all four criteria may receive up to 50% of qualified wages paid from March 12th 2020 to December 31st 2020 per qualified employee up to $10K ($5K maximum for each quarter). These credits are refundable up to 90 days after filing form 941 for each claiming quarter and/or upon filing authority notification if filed earlier than quarterly returns due date.
How to Claim the Credit
The Employee Retention Tax Credit (ERTC) is a tax credit that helps businesses keep their employees during the coronavirus pandemic. The credit is for up to 50% of wages paid to qualifying employees between March 13th and December 31st of 2020. This credit is available to businesses, regardless of size, that experienced financial hardships during this period.
To maximize your ERTC benefits, it is important to understand how to claim the credit.
Calculating the Credit
If you qualify for the credit, you calculate it by multiplying the amount of your qualifying expenses by a fixed percentage. This rate is determined by taking the tax rate applicable to your income bracket, and then halving it to reflect a two-year period over which you can take advantage of the credit. For example, if you’re taxed at 28%, then you’ll qualify for a 14% credit on qualified expenses. The credit amount is then applied against any balance due on your taxes or can be refunded as part of your annual tax return.
In addition to calculating the base amount of your total eligible expenses, there are several other possible variables that can be factored into the calculation depending on circumstances such as:
- Where in Canada you live (each province has different rates)
- Whether or not your service provider participated in any programs aimed at reducing costs
- Any additional costs due to special services available under certain contracts
- The date when payments were made
- Your filing status (single, married, etc.)
It’s important to remember that for each new school year, any unused credits from the previous year do not roll over or accumulate. You must claim them in full every school year or they will be lost.
When claiming the credit, taxpayers will need to provide documentation that verifies their eligibility and they must be able to backup their expenses. It is important to keep track of all expenses associated with the credit and make sure that the necessary documentation is filed in order to claim it.
When filing for the credit, taxpayers will need to provide supporting documents including receipts or invoices for any expenses related to the qualifying activities. Taxpayers should also provide a detailed explanation of how they meet all requirements of the applicable program and how they calculate their credit amount claimed. Any applicable forms or supporting documents should be included when submitting a return filing.
In addition, taxpayers may also be required to obtain approval from the program prior to claiming this credit; if this is required, taxpayers should include proof of approval from the appropriate regulatory body with their submission. Depending on local laws and requirements for qualifying taxes and fees, additional information may also need to be included when claiming this credit.
Timeline for Claiming the Credit
Getting the tax credit for employee retention is an important way for businesses to recieve financial support during difficult times. To be eligible to claim the credit, businesses need to meet certain criteria and submit their claim during the specified timeline.
In this section, we’ll outline the timeline for claiming the credit and what companies need to do in order to take advantage of this benefit:
When to File
When preparing to claim the Employee Retention Tax Credit, it’s important to remember that you will need to file your claim with the IRS early – between the first and 12th month after the date specified in the tax credit notice. You can file either electronically or through paper forms with the IRS. Fees may apply if filing electronically.
After submitting your request, you should receive an approval or denial notice within 4-6 weeks. If there is a need for additional review, processing may take longer and you will receive notification of further review time. Once granted approval and depending on how you filed, payment may take up to three weeks once processing begins.
To ensure rapid processing throughout, be sure to have all required information when filing for Employee Retention Tax Credit:
- Employee Identification Number (EIN)
- Name of Business/ company’s location
- Estimated number of individuals employed (for those filing an amended return)
- Employees covered – These must be classified as qualified by the CARES Act terms from March 13th onward until December 31st of 2020
- List all wages or qualified health expenses eligible for credit calculation
How Long Does It Take to Receive the Credit?
The amount of time it takes to receive the Employee Retention Tax Credit generally depends on the company’s payroll provider and size of the claim. If you use a payroll provider, make sure they are aware of your intent to claim the credit.
Providers are responsible for computing and filing Forms 941 prior to claiming the credit, and may take extra time to set up the system accordingly. Companies that process their payroll information in-house may need additional time to process prior year forms and reconcile their tax credit amount.
Allow at least 8 weeks after filing Form 941 with your applicable quarter’s wages. Most companies will receive their credits within this timeframe. Here is a timeline you can expect:
- Filing Form 941: Within 2-4 weeks from end of quarter
- IRS Processing Time: 4-6 weeks from form filing date
- Receiving Employer Credit: 8 weeks from form filing date
Understanding the Employee Retention Tax Credit (ERTC) and the necessary steps to claim it can be complex. The ERTC is a critical component of the federal government’s Covid-19 relief efforts and it is essential to familiarize yourself with the various resources available to you in order to maximize the credit.
This section of the article will provide a comprehensive overview of the resources available to help you get the most out of your ERTC claim:
IRS Form 941
IRS Form 941 is an official document used by employers to report income and withholding information to the Internal Revenue Service (IRS). It also serves as a registration document for employers who want to take advantage of the Employee Retention Credit (ERTC), a federal program that provides a tax credit of up to $5,000 per employee for wages paid during the 2020 and 2021 taxable years.
Employers can use Form 941 to report wages paid, withholdings due, and whether or not they have elected to participate in the ERTC program. Additionally, Form 941 must be filed on time with the IRS in order for employers who have participated in the ERTC program to receive their tax credit. Employers need to report wages and withholdings made from March 13, 2020 until January 1, 2021 through this form.
To take advantage of the Employee Retention Credit program, employers must file Form 941 on time each quarter. The most recent version of Form 941 was issued in November 2020 with revisions related to reporting wages earned under the ERTC program during prior quarters of 2020. For each quarter that an employer takes part in ERTC they must complete page 5 and page 7 (or page 8) based on if they were participating or not participating in any governmental deferred payment plan with respect to employer’s share Made Available forms of Social Security taxes imposed by IRC § 3111(a). All forms should be mailed or e-filed according to mailing instructions provided by IRS which are available online.
IRS Publication 15
IRS Publication 15, also commonly referred to as “Circular E,” is a guide published by the Internal Revenue Service that outlines the tax obligations of employers subject to federal payroll taxes. This guide includes information about calculating withholding amounts, wages subject to taxation, filing requirements and deadlines for federal tax forms, income tax deposits and other related items. Employers are encouraged to read IRS Publication 15 thoroughly and refer to it often when preparing their payroll or running a particular payroll report.
The most recent version of this publication can be accessed on IRS.gov or requested through the United States Postal Service. Employers are required by law to make sure they understand how to calculate withholdings in compliance with federal guidelines outlined in IRS Publication 15. The publication also contains a section explaining employee rights and responsibilities related to federal employment taxes, including information about deductions and withholdings based on employee marital status or other claims such as healthcare deductions or education expenses. Additionally, employers can find advice about voluntarily adding other benefits for employees such as retirement plans or life insurance policies in this publication.
IRS Publication 535
The Internal Revenue Service (IRS) provides Publication 535 to help individuals understand the tax implications of various types of income and expense items. This publication also includes information on how deductions, credits, and exemptions can help reduce your tax liability.
Publication 535 covers topics including:
- Deductions for businesses and self-employed individuals.
- Business expenses.
- Exemptions for individuals.
- Tax implications for investment income and other miscellaneous items.
- Credits, such as the Child Tax Credit, Earned Income Credit, Retirement Savings Contribution Credit, Affordable Care Act (ACA) refundable credits like the Premium Tax Credit, and more.
- Methods to determine trade or business status.
- How to report tips paid by customers in the restaurant industry.
Additionally this IRS publication contains IRS updates on current tax laws as well as taxpayer information from new federal legislation.