Overview of Employee Retention Credit
The Employee Retention Credit (ERC) is a new tax credit created to help employers impacted by the COVID-19 pandemic. The credit is available to eligible employers who have been subject to full or partial suspension of their operations due to the COVID-19 crisis and have incurred expenses related to the payroll of their employees. The credit is refundable and equal to 50% of up to $10,000 in wages paid by the eligible employer to their employees during the applicable period.
In this article, we will look at how long to receive the Employee Retention Credit.
What is the Employee Retention Credit?
The Employee Retention Credit is a tax credit for employers who are experiencing economic hardship due to the COVID-19 pandemic and are continuing to provide wages and health insurance benefits to their employees. It is available for businesses whose operations were fully or partially suspended during the time period, regardless of size and industry. The Employee Retention Credit may provide employers up to $5,000 in tax credits for each employee.
Eligible employers may be able to claim the credit on their quarterly employment tax returns filed with the IRS in 2021 and can even choose to apply the credits against certain payroll taxes before filing, although employers should consult with a qualified accounting professional or IRS representative before doing so.
Employers who want to learn more about the credit can find further information on the IRS website concerning:
- eligibility requirements
- filing processes
- uses of the credit
- general limitations
- dates with which employers cannot use certain wages to calculate their credit amount
- and more.
Additionally, it is important that employees understand that retroactive wages will not be covered by this particular tax break.
The Employee Retention Credit is a fully refundable tax credit provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. To be eligible for this credit, employers must first meet certain criteria.
Businesses of any size are eligible for the Employee Retention Credit with the following attributions:
- The business must be carrying on a trade or business during 2020.
- The business has either fully or partially suspended operations due to orders from an appropriate governmental authority due to COVID-19; or has experienced a significant decline in gross receipts during the calendar quarter.
In addition, employers must meet two of these three criteria in order to become eligible:
- The employer’s operations have been fully or partially suspended during either all or part of calendar quarter;
- The employer experienced a significant decline in gross receipts when comparing quarterly 2020 gross receipts to 2019; OR
- When compared to the same quarter in 2019, the employer’s gross receipts for one quarter has fallen by more than 50%.
Timing of Employee Retention Credit
The Employee Retention Credit (ERC) is an important tax credit available for businesses that retain their employees during the COVID-19 pandemic. The ERC is an important tool to help businesses preserve jobs and keep people employed. But when will employers receive the ERC?
This article will explain the timing of the Employee Retention Credit to help employers understand when they can expect to receive the credit.
When Can Employers Receive the Credit?
The Employee Retention Credit (ERC) is designed to provide financial assistance to eligible employers who are required to leave their employees with wages and benefits during the COVID-19 pandemic. The credit is activated when employers pay wages and health care benefit costs that make up the employee retention credit.
The credit can be claimed in two ways:
- by reducing quarterly or annual federal income tax deposits on a regular basis, or
- through a claim for refund on Form 941, Employer’s Quarterly Federal Tax Return.
Employers must also make sure that their employee wages and healthcare costs meet the requirements for the credit.
Once employers have determined that they qualify for the ERC, they can then determine when it may be available to them. Typically, employers will receive their employee retention credit within 4-6 weeks after filing their applicable employer return reporting employee wages and benefit costs. However, depending on IRS backlogs related to the processing of returns during this period of time, employers may experience longer wait times in receiving the ERC payments. As such, it is important to anticipate these waiting times when determining when to pursue the availability of an ERC.
How Long Does it Take to Receive the Credit?
The timing of receiving the Employee Retention Credit (ERC) depends on several factors. Employers who are approved for an ERC advance by the IRS can receive their funds as quickly as 3 business days after filing a request for advance. Employers who have not yet applied for the ERC and are planning to claim it through quarterly estimated taxes must wait until filing that return to receive the credit.
It is important to note that the credit is claimed on an employee’s quarterly Form 941, which corresponds with their earnings paid during each quarter—meaning, employers will have to wait each quarter before claiming the credit. Once a Form 941 is filed, employers can expect to receive their credits within 7–10 business days of filing that return. The exact timeline depends on how fast the IRS processes your return once received and how long it takes your financial institution to deposit funds into your account.
Similarly, if an employer files a Form 941-X after an amendment or correction, they should expect credits within 7-10 business days of submitting the form—provided no other issues arise with their tax returns during this time.
How to Claim the Credit
The Employee Retention Credit is a valuable and easy-to-claim tax credit available to employers affected by the COVID-19 pandemic. It allows employers to receive a refundable tax credit of up to $5,000 per employee for each quarter of 2020.
To get this credit, employers will need to know how to claim it and how long it will take to receive. In this article, we will discuss:
- How to claim the Employee Retention Credit.
- How long you can expect to wait before receiving the credit.
How to Calculate the Credit
In order to calculate the Employee Retention Credit, employers will first need to calculate their qualified wages for each quarter. Qualified wages are generally the wages subject to federal income tax withholding plus the employer’s portion of Medicare expenses and certain health care expenses paid or incurred during 2020.
The credit is available for up to $10,000 in qualified wages per employee (50% of $10,000 = $5,000). The maximum credit available for an employee is limited to two quarters (for a total of $10,000) and any excess qualified wages used in one quarter are not eligible for the credit in another quarter.
Once employers have calculated their qualified wages paid during 2020, they should complete IRS Form 941-X Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. This form must be completed and signed by both parties to be eligible for the credit.
Employers can also complete an online application through their financial institution if they qualify. If approved, employers will receive refundable tax credits which can offset future payroll withholding until it is used up.
How to Claim the Credit on Your Tax Return
The employee retention credit (ERC) is a refundable payroll tax credit of up to $5,000 per employee. Employers who have experienced business disruption or economic hardship due to the COVID-19 pandemic may be eligible to receive the credit when they file their federal taxes. Here’s how you can claim the credit on your tax return.
First, employers must determine if they are eligible for the ERC according to IRS guidelines. Businesses with 100 employees or less whose gross receipts have declined by 20 percent or more compared to 2019 can qualify for the credit. Employers should also make sure that their employees were on payroll for at least one month before March 13, 2020 and were not receiving paid sick leave or other benefits from the employer related to COVID-19.
Once you’ve established your eligibility, it’s time to figure out how much you can claim in credits. The amount that you are able to claim is based on a sliding scale determined by your gross receipts and employee count. The maximum amount that employers are able to claim per employee is $5,000 and employers don’t need to worry about reducing credits due to other types of reimbursements during 2020; all payments made before December 31st count towards the ERC reimbursement cap.
It’s important that employers fill out Form 941 correctly in order for them to get an accurate estimate of their refunds when filing their federal income tax return along with Form 7200 Credit For Paid Sick Leave And Paid Family & Medical Leave Or Employee Retention Credit And Coronavirus Tax Relief & Payment To Eligible Employees For Families First Coronavirus Response Act Purposes (Form 7200). Employers should also consult with a trusted accountant if they need assistance filing either form or if they want more information about claiming other tax credits related to COVID-19 pandemic related expenses.
One of the best ways to learn more about the Employee Retention Credit (ERC) is to research the topic and understand the various regulations and requirements associated with it. The American Rescue Plan Act includes new provisions and guidelines, and the IRS provides additional resources to help employers understand the rules and regulations.
Additionally, there are other online resources available to businesses seeking to take advantage of ERC:
It is important for business owners to familiarize themselves with the Internal Revenue Service (IRS) rules and regulations that govern their particular industry. Tax laws are ever-changing, so it is essential to stay informed about the latest guidance provided by the IRS on their website.
The IRS offers extensive guidance specific to businesses, including options for self-employment tax deductions, tax filing requirements and information on other professional topics. The general Small Business and Self-Employed section of the website provides comprehensive articles on how to file taxes as a self-employed entity, including forms and instructions. The website also offers interactive tools to assist in accurately calculating your tax liability as a self-employed individual.
In addition, there are other informative guides provided specifically for businesses and their tax requirements related to income, deductions and credits that are available depending on certain circumstances such as:
- Forms of Self-Employment Taxation – Explanations of corporations, LLCs, partnerships and more
- Depreciation Rules – Explaining methods for recovering business expenses over time
- Sole Proprietorship Tax Information – Outlining general rules for filing taxes as a sole proprietor
- Partnership Taxation Guidance – Going into detail about filing taxes when working in a partnership relationship
Ultimately, relying on up-to date IRS guidance can help business owners properly plan for their income taxes each year and make sure they’re staying compliant with prevailing IRS regulations.
State specific programs are available for the Employee Retention Credit. Employers should research their state’s Department of Labor website to review any specific requirements or applicable resources. State tax authorities may also provide additional information that is pertinent to an employer’s specific situation. Some of the common questions that might be answered on a state-level website include:
- Income eligibility criteria (including minimum wages)
- Retention period and associated employee hours thresholds
- Maximum credit amounts
- State filing deadlines (including extended dates due to federal extensions)
- Additional documentation requirements
It is important to pay close attention to all applicable restrictions and requirements as they may vary by state. Employers should maintain accurate records of all available program information, including payroll records, tax returns and applicable certifications, in order to substantiate credit calculation methods and eligibility.