Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit is a tax credit available to businesses that have been impacted by the pandemic. The purpose of the credit is to incentivize businesses to keep their employees on payroll.
This section will provide an overview of the tax credit and help you understand:
- What it is
- Who qualifies for it
- How to claim it
What is the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC), created as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act in 2020, was designed to incentivize businesses to keep employees on their payroll during the COVID-19 pandemic. The ERTC provides an up-to $5,000 refundable tax credit per employee per year for eligible employers whose operations have been disrupted or partially suspended due to measures taken by the government in response to the spread of COVID-19.
Eligible employers may qualify for a credit equal to 50% of qualified wages they pay to employees after March 12, 2020 and before January 1, 2021. Qualified wages paid on or before December 31, 2020 are capped at $10,000 for each employee in 2020. The maximum credit an eligible employer can receive is $5,000 for any employer per calendar quarter during 2020 ($1k x 5 quarters = $5k maximum). Wages paid after December 31, 2020 do not count toward the credit so employers must take advantage of it before then.
In order to qualify for the ERTC program an employer must:
- Be an eligible employer – small or large business;
- Have its operation partially or fully suspended by orders from federal/state/local governments; or
- Have a significant decline in gross receipts (at least 20%) compared to 2019’s same calendar quarter gross receipts.
Self-employed individuals may also be able qualify if their operation is affected by government orders related to COVID-19.
Who qualifies for the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is designed to incentivize businesses to keep employees on their payroll during the COVID-19 pandemic. Eligibility criteria are based on a company’s size, geographic location, and economic status.
To qualify for the ERTC, employers must meet certain criteria relating to their size, location and economic condition. Companies with fewer than 500 employees are eligible for the ERTC if they have experienced a significant decline in gross receipts for any quarter in 2020 compared to the same quarter in 2019.
In addition, certain national disaster areas qualify for ERTC benefits regardless of their gross receipt declines for that quarter. These employees must have been employed by an eligible employer at any time after March 12-December 31st 2020.
The amount of credit available depends on several factors including whether an employer had a full or partial shutdown due to COVID-19 related regulations, the total number of hours the affected employee(s) worked during those applicable quarters and other variables related to wages paid. Depending on these factors, employers may be able to claim credits up to $5000 per employee each quarter through December 31st 2020 or up to $2800 per employee after that date through June 30th 2021.
In order to determine eligibility for the ERTC, employers should review all available documentation related to their employees’ work schedules and compensation from late March through December 2020 or from January 2021 until June 30th 2021. Employers must also review other relevant documents such as fiscal publishing reports submitted after March 12th 2020 based on total gross receipts as well as state or federal economic regulatory changes imposed during this period.
Calculating the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a tax incentive provided by the IRS to help businesses offset the costs of retaining employees during difficult times. Calculating the ERTC accurately is important in order to maximize the benefits available to businesses.
The following will explain how to properly calculate the ERTC:
Calculating wages eligible for the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a financial incentive provided by the U.S. federal government to employers who retain their employees or pay wages after March 12, 2020 and up to December 31, 2020 as part of economic relief efforts in response to the COVID-19 pandemic. Whenever the qualified wages are paid or incurred, employers may claim a tax credit up to an amount equal to 50% of certain wages they pay during this period.
The level of wages eligible for the ERTC depends on whether an employer’s operations were fully or partially suspended due to COVID-19 related shut down orders, or if its gross receipts declined by more than 50%. An employer’s eligibility for the ERTC is based on either test described below:
- The employer’s operations must have been fully suspended due to a governmental order related to COVID-19;
- The employer must show that it has experienced a significant decline in gross receipts for a calendar quarter that starts after February 29, 2020 and ends before January 1, 2021 compared with the same calendar quarter in 2019. This can be determined by comparing quarterly gross receipts from between April 1, 2019 and June 30, 2019 compared with April 1, 2020 and June 30, 2020 respectively;
- Calculate qualified wages incurred in calendar quarters where gross receipts declined over 50% – Qualified wages are limited up to $10,000 per employee per calendar quarter where an employer has experienced a certain level of revenue reduction. Total qualified wages cannot exceed $10 million (across all impacted/eligible quarters).
- Calculate qualified wages incurred during temporary shutdowns – Qualified wages are defined as employee payroll costs (excluiding payments for vacation/leave time) associated with services performed during temporarily suspended periods resulting from orders due to COVID-19 — up tp $10,000 per employee per 90 days during full suspension periods. Maximum total qualified wages under this provision cannot exceed $100 million across all eligible employers.
Calculating the amount of the Employee Retention Tax Credit
The amount of the Employee Retention Tax Credit is calculated as a percentage of eligible wages paid to an employee during the 2020 calendar year. The credit begins at 50% and increases to 70% of qualified wages paid if the employer meets certain requirements, such as having a gross receipts decrease. The maximum amount of qualified wages taken into account in determining the amount of the credit is $10,000 per quarter for each employee.
Eligible employers can claim this refundable payroll tax credit each quarter until December 31, 2020. It can be used to offset an employer’s federal employment tax obligations, even if an employer does not have sufficient federal employment taxes to fully utilize the credit. Eligible employers will be required to reduce their federal employment taxes before claiming a refund for any excess credits. To determine if you are eligible for this benefit and what your tax credit amount might be, check out the US Treasury’s Employee Retention Tax Credit Calculator HERE.
The taxable wages used in calculating the amount of this tax break must meet certain IRS criteria and those criteria vary depending on size of business and other factors. Employers should review specific guidance from IRS Notice 2020-23 which provides details on which wages are qualified and other conditions that must be met in order to receive this benefit. Those requirements are complex and ever changing so it’s best practice to consult with a professional business advisor or financial adviser before determined you eligibility and calculating how much you may receive through this tax incentive program.
Claiming the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a tax credit for businesses dealing with the economic hardships caused by the Coronavirus pandemic. It was passed as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.
The ERTC is intended to help businesses keep employees in their payroll and reduce the burden on businesses from payroll tax payments. Let’s take a closer look at how you can claim the ERTC:
How to claim the Employee Retention Tax Credit
Employers who qualify for the Employee Retention Tax Credit (ERTC) can receive a tax credit of up to $5,000 per employee, per year. The ERTC is a program set up by the IRS to help employers financially recover from the economic effects of the COVID-19 pandemic. To be eligible for ERTC, employers must meet certain criteria and must have experienced a full or partial suspension of operations or have experienced significant financial hardship due to COVID-19.
In order to claim the Employee Retention Tax Credit, you first need to determine if you are eligible by evaluating your business and whether you meet the qualifications established by the IRS. Some key items to consider include:
- Is your business fully or partially suspended during any calendar quarter in 2020 as a result of orders from an appropriate governmental authority due to COVID-19?
- Did your business experience a decline in gross receipts of more than 50% compared to gross receipts for the same calendar quarter in 2019?
If so and you wish to claim ERTC, it is important that you keep accurate records throughout the year and review all applicable forms before filing. Once determined that you are eligible, follow these steps:
- File Form 941: Employers can use Form 941 (Employer’s Quarterly Federal Tax Return) each quarter when filing their taxes with the IRS; attach Schedule R (Credit for Sick and Family Leave). To complete this form, employers will need payroll information such as wages paid and taxes withheld.
- Request repayment: After filing form 941 with Schedule R attached, employers can request an immediate repayment of quarterly employer taxes equal to the amount of their qualified retention credits using Form 7200 (Advance Payment of Employer Credits Due To Covid-19).
- Take advantage of new refund procedures: For tax year 2020 only, if an employer claims ERTC on its fourth quarter return but does not pay enough in payroll taxes throughout 2020 then it may be able to obtain a refund instead when filing its annual return – usually Form 990T – with Schedule J (Form 990T Income Averaging for Small Business Owners).
- Document all claims thoroughly: All claimants should keep detailed records about how they calculated their qualified wages and related credits less claims already filed via Form 7200 during that Q4 period. These records should include written support such as pay stubs proving withholdings as well as documents indicating sufficient justification for that credit amount as required by law. Businesses must retain this documentation through 2023 in order to verify claims at audit time should they be chosen.
Documentation needed to claim the Employee Retention Tax Credit
To claim the Employee Retention Tax Credit, taxpayers must provide supporting documentation to prove they meet the requirements. This includes payroll and income taxes, as well as other records such as business rent or lease payments, proof of full-time employee counts, proof of wages paid to employees and other supporting documents.
Payroll: Any applicable payroll excluding deferred compensation must be included when claiming the Employee Retention Tax Credit. This applies to any wages given to an individual which has made them an employee independent contractor relationship or are paid under a retirement plan such as a 401(k). Pay is considered “wages” if it is taxable at both federal and state levels. Any payroll deposited into eligible retirement accounts does not qualify for the credit.
Income Taxes: Employers must also include their quarterly income tax filings when claiming the Employee Retention Tax Credit in order to demonstrate that the qualified wages were paid and not just withheld from employees’ paychecks. Any unpaid taxes or estimated taxes that were due by March 31 of 2020 may be excluded from this calculation.
Lease Payments: Lease payments made from May 1-December 31 of 2020 (or June 1-December 31 for employers in states following quarters) can be used to demonstrate how much business rent was paid during this time period when claiming the credit. Documentation proving that all posted payment deadlines were met may also need to be submitted with your claim paperwork depending on your local rules and regulations.
Employee Counts: In order for employers to qualify for the full amount of their Employee Retention Tax Credit, they must demonstrate that their average number of full-time employees (defined as someone being paid more than $4000 each quarter from March until December 2020) decreased by 50%. This number should exclude any current or former employees who were laid off after January 1st 2021 in order to remain eligible for this tax credit program. Employers will need evidence such as copies of employee pay stubs or other forms of evidence that show dates and amounts of pay provided during this period in order to properly document their count figures accurate counts when filing out paperwork associated with this program.
The Employee Retention Tax Credit (ERTC) is a powerful tool that can help employers offset some of the costs of keeping their employees on the job during the pandemic. However, there are other considerations that employers need to take into account when deciding whether or not to take advantage of the ERTC.
In this section, we will discuss some of the other considerations that employers should consider when deciding whether or not to use the ERTC:
- Tax implications of using the ERTC
- Timing of when to claim the ERTC
- Eligibility requirements for the ERTC
- Potential impact of the ERTC on other benefits
When the Employee Retention Tax Credit cannot be claimed
The Employee Retention Tax Credit (ERTC) is a refundable federal tax credit available to all employers regardless of size, who are experiencing financial hardship due to COVID-19. Generally, employers are eligible for the ERTC if operations have been partially suspended or gross receipts have declined by more than 50 percent compared to the same quarter in 2019.
Although everyone may be eligible to claim this tax credit, there are certain situations where it cannot be claimed. Here’s a quick overview:
- The employer must have a consistently issued payroll between March 13th, 2020 and January 1st, 2021.
- The employer must have fewer than 500 full time employees.
- No double dipping allowed – businesses with employees that have continued receiving income from other COVID relief programs (such as Paycheck Protection Program) after October 1st and into 2021 do not qualify for the ERTC during these periods.
- Retired Employees and Self Employed Individuals do not qualify for ERTC benefits.
- A business that receives subsidies from a government agency (other than local or native tribe agencies) is not eligible for the ERTC if any of those funds are used to pay wages during the covered period.
Interaction between the Employee Retention Tax Credit and other credits
When considering taking advantage of the Employee Retention Tax Credit, business owners should also be aware of other credits that may impact their situation. Specifically, the Family First Coronavirus Response Act (FFCRA) provides employers with a refundable payroll tax credit for certain paid leave wages. Additionally, businesses may qualify for the refundable Employee Retention Credits under Section 1400Z-1 in the Coronavirus Aid, Relief, and Economic Security Act (CARES).
The FFCRA is enforced by the U.S. Treasury Department through an application for EFMLA credits, which can only be taken against a reduced amount or excess FICA taxes paid at the end of each quarter or through an adjustment to deposits made during the quarter in order to reduce next quarter’s liability for taxes due. The ERTC is enforced by the IRS through Form 941 and cannot be used to reduce or offset obligations under any other part of subsection 3111(a).
The FFCRA allows employers to receive a general tax credit of up to 100 percent of qualified sick leave wages paid between April 1 and December 31, 2020 while subjecting them to limitations on qualified family leave wages paid during that same period. The CARES Act provides employers with a refundable Employee Retention Tax Credit worth up to 50 percent of qualified wages paid between March 13 and December 31, 2020 that are excluded from gross income due to qualified health plan expenses. This credit differs from FFCRA in several ways incidental to coverage and administration including but not limited to rules surrounding self-employed individuals; the exclusion from gross income; minimum employee headcount requirements; payment date limits; definitions related to closure mitigation period; banking services considerations and consistent treatment rules for entities within controlled or affiliated groups.
These credits are complex so it’s important business owners understand how they interact when making decisions on how best utilize available relief programs available relating employee head count retention. For example, employers must choose which program – either ERTC or EFMLA – makes more fiscal sense given their circumstances as both have different qualifications connected with who qualifies over any particular period as well as varying calculation parameters related benefits multipliers applied depending upon who is receiving them (i.e., employees below certain pay thresholds versus those above them).
It is crucial that employers identify all laws applicable before making decisions about employee retention programs based on factors like associated credits vs allowable deductions and their impact on taxable income given restrictions imposed by cost recovery legislation recently passed on things such as state & local taxation issues(SALT). Before acting it’s important that you carefully review current regulations pertaining not only regarding tax considerations associated with these options but also employment law standards including labor regulations enumerated by DOL provisions so as not create court challenges resulting from non compliance violations regarding issues such benefits & pay/tax related withholdings required at both federal & state level. Understanding ALL relevant regulations helps ensure proper decision making processes are adopted when considering if/how these programs should be utilized while safeguarding against challenges down road with respect claimed indiscretions connected adoption strategies subject opinion based organizational choices followed w/ respect thereto programs up offered.