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Overview of Employee Retention Credit
The Employee Retention Credit (ERC) is one of the key components of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This credit is designed to provide financial incentives for businesses to keep their employees on their payrolls during economic difficulties caused by the coronavirus pandemic.
Employers can receive up to 50% of wages paid to their retail, hospitality, and food service workers, and up to $5,000 per employee in tax credits. It is important to know how long it takes to receive this credit as soon as possible.
Eligibility requirements
The Employee Retention Credit is a refundable tax credit for businesses affected by the coronavirus pandemic. The credit is available to employers with 500 or fewer employees that are either fully or partially suspended due to orders from an appropriate governmental authority, or that experience a significant decline in gross receipts.
Employers must also meet specific requirements in order to qualify for the credit. To qualify, employers must meet the following criteria:
- Eligible employers must have been carrying on any trade or business during calendar year 2020, including tax-exempt organizations.
- Tax-exempt organizations are allowed to claim this credit as long as they have unrelated business taxable income and would not be subject to the unemployment tax rate if they were a for-profit employer.
- In order to qualify for the full $5,000 credit, total wages paid each quarter are limited to $10 million per employer (or less than $15 million average annual wages).
- Employers that received Paycheck Protection Program loans cannot participate in this program until their loan balance has been fully forgiven by the Small Business Administration.
- Employees must be retained from March 13th through December 31st of 2021, and hired before February 28th of 2021 will be eligible for this program.
- Finally, employer’s gross receipt declined may not exceed 50 percent when compared with the same quarter in 2019 (or an average quarterly gross receipts calculation).
Types of expenses covered
The Employee Retention Credit (ERC) covers certain expenses that are required to retain and keep employees on payroll. For tax years 2020 and 2021, businesses may be eligible for a fully refundable credit against their Social Security tax liability of up to $7,000 per employee. Covered expenses include wages paid to employees, health benefits coverage maintained during a period where the business is financially impacted by the COVID-19 pandemic, and certain benefits related to family or medical leave time granted due to the pandemic related purposes.
The ERC also awards employers with a tax credit for qualified wages paid from August 1, 2020 through December 31, 2021 which are not taken into account when determining any other credits that relate to employment taxes imposed under Internal Revenue Code section 3111(a) or 3211(a).
The exact amount of tax credit provided depends on the number of full-time employees employed as of December 31. If a business successfully qualifies as an eligible employer with fewer than 500 full-time employees, they can receive a 50 percent credit for all qualified wages paid up to $10,000 in total per employee for all calendar quarters in 2020 and 2021 combined.
Applying for Employee Retention Credit
Applying for employee retention credit can take some time, depending on the type of claim you are submitting and the amount of paperwork required. The process of receiving the credit can be time consuming, since you have to provide all necessary paperwork to the IRS in order to be eligible for the credit.
This section will provide an overview of the process and what to expect when applying for the credit:
Filing Form 941
When applying for the Employee Retention Credit, employers are likely required to file a special quarterly version of form 941, known as Form 941-X. Depending upon the method used when submitting Employer’s Quarterly Federal Tax Return, it typically takes one to two weeks to process Form 941 and any accompanying documents.
Once your tax filing is complete and you have recorded the employee retention credit from line 14b on Form 941, you will need to wait for it to be processed by the Internal Revenue Service (IRS). If a refund is due, it will typically take three weeks or more after filing for your refund check or direct deposit to arrive. In addition, there may be some extra time needed for a check request or authorization process once the amount and return type have been determined by the IRS.
While there isn’t an official timeline from when you are able to start filing until when you can expect your credit funds, expediting your submission is recommended since employers receive refunds faster compared to other employers who wait until closer to their deadline date. Submitting forms early also avoids potential errors that can occur in form submission processes close to their deadline date. Filing accurately and checking on statuses regularly will ensure that payment processing is runs smoothly and quickly as possible.
Completing Form 7200
Completing Form 7200 requires employers to complete a number of items in order to receive the Employee Retention Credit. It is important to have the right information ready when completing this form so that employers will be able to receive their credit as soon as possible.
Form 7200 should include each of the following:
- Employer’s name, address, EIN (Employer Identification Number) and average number of employees for the tax year
- Date business operations were fully or partially suspended due to orders from a governmental authority related to COVID-19
- Total Qualified Wages & Allocated Health Plan Expenses paid by calendar quarter
- Total of employee retention credit claimed by calendar quarter
- Evidence that employer received an order from a governmental authority related to COVID-19 (which is required if claiming credit after 12/31/2020)
After all the necessary information has been provided, employers must sign and date Form 7200 and file it with their federal income tax return for each calendar quarter they want to claim the Employee Retention Credit. Employers should keep copies of all documentation that support their claims. Once filed, employers can expect their money back within 6 weeks from when they submitted Form 7200.
Timing of Receiving Employee Retention Credit
Employee retention credit (ERC) is a key tool for employers during the COVID-19 pandemic. Employers that qualify for ERC will receive a refundable tax credit for wages paid to retain their employees. One of the key questions for employers is how long does it take to receive the credit?
This article will detail the timing of receiving ERC from applying for the credit to actually receiving it:
When to expect funds
The Internal Revenue Service (IRS) announced the Employee Retention Credit (ERC) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in late March 2020 to support employers in keeping their workers on payroll during the pandemic. This credit provides a refundable payroll tax credit for 50% of up to $10,000 of wages per employee up to a maximum of $5,000.
Employers can receive an advance payment of the ERC when they submit Form 7200 with their next payroll submission. When you submit Form 7200, include copies of all necessary documentation, such as employee records or W-2s showing wages paid. Once the IRS has received your submission and approved your request for an advance payment of ERC funds, they will direct deposit your funds within 14 days.
If you do not need an advance payment to meet payroll or keep employees on overage during this period, you can claim the ERC through filing Form 941 quarterly. If you choose this option, you can expect a refund soon after filing for each quarter. The amount will be based on wages paid in that quarter and any advances received during that period will be deducted accordingly.
How long it takes to receive credit
The key to understanding how the Employee Retention Credit works is the timing of when employers can receive the credit. Employers need to plan and budget properly in order to maximize their benefit from this provision.
Generally, employers can begin claiming the credit by reducing employment taxes on a quarterly basis or through a refundable credit per employee per quarter. The credit is generally limited to eligible wages paid after March 12, 2020 and before January 1, 2021.
After an employer has determined their eligibility, they will need to electronically file Form 941 reflecting their estimated qualifying wages and credits with the IRS each quarter. Then they must submit Form 7200: “Advance Payment of Employer Credits Due To COVID-19” to request an advance payment of up to 70% of the anticipated refund using IRS submission processes. After submitting this form, employers can expect an email from the IRS with instructions on how to submit information for determining their refundable credits for each quarter based on actual qualifying wages paid for that period. Finally, once an employer submits this information, they should expect to receive their advance payments within two weeks or less if all necessary forms were completed correctly.
Additional Considerations
When applying for the Employee Retention Credit (ERC), there are a few additional things that employers should consider. Navigating the ERC requirements and filing the necessary forms is a complex process and often takes more time than you might anticipate. Therefore it’s important to understand the entire process and the timeline for successfully applying for the credit. This will help employers to better plan for the resources needed during this process.
Interaction with other credits
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Recordkeeping requirements
Along with the requirements for eligibility and calculation, employers must meet stringent recordkeeping requirements to receive the Employee Retention Credit. Employers should keep detailed records of their W-2 wages, health plan expenses, qualified sick and family leave wages, qualified leave offsets and other documents used to support the credit calculations.
It is also important to remember that the amount of qualified sick and family leave wages taken into account under this credit may not exceed the amount of employers’ portion of Social Security tax on all their employees’ wages. Furthermore, in order to claim the employee retention credit, employers must file amended quarterly forms 941 reflecting any changes made to previously reported liabilities.
Finally, evidence that shows an employer has complied with all requirements should be provided upon request from the IRS in order to avoid potential penalties for failure to comply with filing or recordkeeping requirements.