How to Apply for Employee Retention Tax Credit 2021

Overview

The Employee Retention Tax Credit (ERTC) is a refundable tax credit included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide a financial incentive for employers to retain their employees. The credit is available to businesses who have been financially impacted by the COVID pandemic.

This article will provide an overview of the necessary steps and requirements needed to apply for the ERTC:

What is the Employee Retention Tax Credit?

The Employee Retention Tax Credit is a refundable tax credit available to employers of all sizes that helps to offset the costs of paying employee wages during the impacts of the COVID-19 pandemic. It applies for qualified wages paid after March 12, 2020, and before January 1, 2021.

To qualify for the credit, businesses must have either fully or partially suspended business operations due to governmental orders or experienced a significant decline in gross receipts from the same quarter in 2019.

Eligible employers can receive a credit equal to 50% of qualified wages paid by the employer between March 12, 2020 and December 31, 2020, up to $5,000 per employee. Qualified wages include payroll incurred after March 12th and before January 1st provided there is no other access to tax credits such as the Payroll Tax Deferral or Families First Coronavirus Response Act (FFCRA). Eligible employers may be able to claim an increased national tax credit limit by increasing their employee count in comparison with 2019.

The amount of qualified wages which an employer can use toward this tax credit depends on their qualifying period; employees will receive a maximum credit if they paid $10K per employee from March 13th through December 31st; however if employers pay less than $10K during this time period it will be pro-rated accordingly.

It’s important for employers eligible for this credit to understand the impact it will have on their taxes should they choose not to apply for it. Employers should consult with their accountant or CPA on whether or not this tax credit is worth applying for before taking any action regarding it.

Who is eligible for the Employee Retention Tax Credit?

The Employee Retention Tax Credit (ERTC) is a federal tax credit available to employers who have experienced a reduction in gross receipts due to the COVID-19 pandemic. The ERTC is designed to help businesses cover payroll expenses during the period of economic disruption resulting from the pandemic. In 2021, employers may be eligible for up to $7,000 per employee in tax credits.

To be eligible for the ERTC, an employer must meet all of the following criteria:

• Have experienced a reduction in gross receipts of at least 20 percent when compared to the same quarter in 2019 OR
• Have suspended or reduced operations due to governmental orders related to COVID-19.
• Be an employer with 500 or fewer full-time employees who were employed on average during 2019. For employers with more than 500 full time employees, wages paid for personnel not related to services rendered are excluded from being considered as “employee wages”.
• Retain current employees and provide them with wage replacement equal to at least 50% of their wages from January 1, 2021 through June 30, 2021 (although there are special rules related to seasonal workers).
• Conversely, employers that increase their headcount AND pay rate after February 15th by June 30th may also qualify for a credit (subject to other conditions).

This credit applies both retroactively towards wages paid after March 13th, 2020 and through June 30th, 2021. Employers can take advantage of this credit by reducing their 6th quarter estimated taxes by up to 25% or alternatively deferring certain quarterly taxes until 2022 without penalty. Consult your local tax advisor regarding taking advantage of this ERTC benefit in order modify withholding taxes accordingly and ultimately maximize your available funds during these difficult times.

Application Process

For employers who want to take advantage of the 2021 Employee Retention Tax Credit, there is a specific process for applying for the credit. The first step is to fill out the necessary forms from the IRS. Depending on the particular qualifications of the employer, there may be different forms to file.

Additionally, employers must also provide supporting documentation to back up the information on the forms. This includes copies of W-2 forms and payroll records.

Gather necessary documentation

When applying for the Employee Retention Tax Credit, employers must provide information and documentation that is necessary to support their claim. Eligible entities may claim a tax credit equal to 50% of the qualified wages they paid their employees during the period they had a full or partial suspension of business due to governmental orders.

Gathering necessary documents can include:

• Copy of governmental order issued causing complete or partial suspension of business operations due to COVID-19
• Documentation detailing total wages paid for each quarter in 2021 as well as 2020
• Form 941 for each quarter in 2020 and 2021
• Copies of various related forms, such as 1099s, W-2s, etc., if applicable
• Total number of employees on payroll filing day (first day of each calendar quarter)
• Total number of FTEs on payroll filing day (first day of each calendar quarter)

Employers must also provide detailed information about their wages that are eligible for the tax credit, including:

• Calculations for separately stated qualified health plan expenses allocated to the wages
• Definition and amount allocated to qualified family leave wages
• Reimbursements received under certain governmental programs attributed to employee wages when calculating amount eligible for tax credit
• Control group information when multiple entities are involved

Assembling all this documentation can be an involved process. Make sure it is completed accurately and completely before submitting your application.

Complete IRS Form 941

Completing IRS Form 941 is an essential part of the application for the 2021 Employee Retention Tax Credit (ERTC). This form must be filed each quarter by employers who wish to claim the credit. The IRS 941 collects information from employers about their wages paid and taxes withheld in reference to their employees.

Employers should also remember to complete and attach a completed Form 9409-X that reconciles any discrepancies between quarterly wages or tax withholding reported on Form 941, W-2 or 1099s filed with the Social Security Administration (SSA). Employers are required to provide additional information as requested in order to properly report amounts credited and any adjustments on Form 9405.

It is important for employers to become familiar with all of the requirements and forms associated with filing for ERTC before submitting their application. The forms and instructions are available at the IRS website. Employers should review all documents closely and contact a tax professional if they have any questions or concerns regarding reporting or filing deadlines.

Submit the application

When you’re ready to submit the application for the Employee Retention Tax Credit (ERTC) for 2021, there are a few steps to take. To complete your application you’ll need to provide your tax information from 2020, including all records and supporting documentation related to employee wages and tips.

1. First, you will need to choose the filing period for which you would like to apply: one or both quarters of 2021.
2. Second, fill out Form 941-X and the ERTC worksheet found in the IRS instructions provided. Then attach the required documents according to IRS instructions. It is important that Form 941-X is filled out correctly and all required documents are included with your submission in order to avoid delays or returns by the IRS.
3. Once your application has been correctly completed, review it again and certify that all entries are correct before sending it via mail or e-file to the address provided on IRS instructions specifically for this tax credit.
4. After filing, you should receive notification from the IRS within six weeks of filing if your application was accepted or rejected; if necessary make modifications and re-submit.

Calculating the Credit

Employers who qualify for the employee retention tax credit in 2021 can claim a tax credit equal to 50% of the qualified wages paid to each employee. To calculate the credit, employers must add up the qualified wages and health plan expenses for each of their employees. After taking these expenses into account, employers must then determine the total credit available for all employees.

From there, employers must determine how to best use the credit to reduce their tax burden.

Determine eligible wages

If you have an eligible employee that you have provided wages or qualified health plan expenses, you are able to receive a tax credit equivalent to 50% of the eligible wages paid in 2020 up to $10,000 per employee.

The first step in being able to take advantage of this tax credit is to determine your qualified wages – those employees that had their wages reduced by more than 20%, or those whose hours were reduced by more than 50% due to the pandemic – in order to calculate the amount of credit you are eligible for. To qualify for the tax credit, each employee’s wages must total between $2,500 and $10,000, which is annualized throughout 2020.

Employers will need to consider four separate periods for each of their employees in calculating the amount of qualified wages:

1. January 1 – March 12;
2. March 13 – June 30;
3. July 1-December 31; and
4. during any shut-down period after December 31st if applicable.

Employers will then subtract any pre-crisis wages paid during these periods from post-crisis wages paid (the difference being equal to your qualified wages).

Additionally, employers need to adjust the amount of maternity leave pay they provide on a regular basis so that it can be considered when calculating the applicable contribution percentage and eligible wages computation. The adjustment has a distinct set of rules depending on when it is offered and whether it is provided after December 31st in 2021. Employers should ensure they properly adjust maternity leave pay so it properly contributes when calculating their eligible wage amounts for this tax credit program.

Calculate the credit

The Employee Retention Tax Credit (ERTC) is an incentive created by the CARES Act of 2020 to reward businesses for bringing back employees to their pre-pandemic numbers. Businesses that qualify can claim a credit of up to $5,000 for each employee kept on the payroll in 2021. To calculate the credit amount, you must first determine if your business meets the criteria for eligibility.

Eligibility Requirements

• Your business was forced to partially or completely suspend operations due to government restrictions in response to COVID.
• Your business has experienced a significant decline in gross receipts during one or more quarters of 2021 compared to one or more corresponding quarters of 2019 or 2020.
• The amount and number of employees must be reported on Forms 941 on a quarterly basis and compared with reported amounts and numbers from the prior year’s corresponding quarter(s).

Once you have determined eligibility, you can calculate your potential credit amount though there are some factors which determine how much credit you can receive. The maximum ERTC post-payroll tax refundable credit is $5,000 per employee; however, it could be less depending upon other factors and is subject to adjustment for inflation according to the Consumer Price Index for All Urban Consumers (CPI-U) published by the Bureau of Labor Statistics.

Other important factors for calculating your ERTC:

• Number of qualifying employees retained during pandemic period – Max Credit Is $5K Per Employee Per Quarter For 2021
• Amounts paid in calendar year wages related to each qualifying employee who earns at least $10,000/quarter – Credit potential vary by wages paid per quarter per employee:
  • Employers paying between 0-$7k = Maximum Tax Credit Of 70% Of Wages Paid
  • Employers paying between >$7k-$10k = Max Credit Is Limited To 70% Under formula
  • Employers paying >$10K = No Max Varied Rate Per State Basis Across The Usa
• Any qualified health plan expenses allocated where applicable – Qualified Health Plan expenses allocated toward health plan premiums is also eligible
• Eligible business losses incurred by a self-employed individual through income reduction and gross receipts reduction can be claimed under ERTT – If income has been reduced from 2019 levels or self-employment revenue dropped 25% or more from pre-pandemic levels – Potential Nonrefundable Credits Variation

To calculate your potential credits after taxes have been withheld: subtract any federal income tax deposits made throughout the year before asking for an advance refundable credit equal up.

Determine the maximum credit amount

Under the Employee Retention Tax Credit, eligible employers can claim a maximum credit amount of up to 50% of qualified wages for up to $10,000 of wages per employee for the calendar year 2021. The credit amount is based on qualified wages and the number of full-time employees employed during the year. To determine the maximum credit amount, you’ll need to calculate how many months you were eligible for the credit and how much each employee earns in qualified wages in 2021.

Eligibility is based on two conditions:

1. Your business operations have been partially or fully suspended because of orders from an appropriate governmental authority limiting commerce, travel or group meetings; or
2. Your gross receipts have declined more than 50% compared to last year’s same quarter Gross Receipts.

To determine your maximum credit amount using this eligibility period and reimbursement percentage, use these three steps:

1. Determine your gross receipts for 2020 and 2021. You must compare Q1 2021 to Q1 2020 – For each period look at all sources (Sales, Payments from Customers)/Costs & Expenditures (COGS).
2. Calculate your reduction rate – Subtract Q1 2021 Gross Receipts from Q1 2020 gross receipts and divide that number by Q1 2020 Gross Receipts.
3. Calculate average salary per worker – Take total salary paid to workers in 2021 divided by total # of workers. This will tell you what percentage you can get back per employee as a tax benefit when filing your taxes.

Finally add all these numbers together to determine your maximum Employee Retention Tax Credit benefit – Take the monthly reimbursement % multiplied by months eligible multiplied by average salary per worker = Maximum Credit Amount available under this program.

Claiming the Credit

The 2021 employee retention tax credit (ERTC) provides a valuable opportunity for businesses to receive a tax credit equal to a percentage of wages paid to employees. Businesses are eligible to receive a refundable tax credit up to $7,000 per employee and up to $14,000 per employee if the business takes advantage of the additional credit retroactively.

To apply, businesses must first meet certain eligibility criteria and understand the necessary steps to claim the credit. Let’s explore these details:

Claim the credit on your quarterly tax return

Employers who are eligible to claim the Employee Retention Tax Credit 2021 will need to claim the credit on their quarterly tax return. The first step is to review the comprehensive requirements set out by the IRS; this will ensure employers know how to apply for and receive the full benefit of the credit.

Once employers understand their eligibility, they can then calculate their potential credit amount using a straightforward worksheet provided by the IRS. Employers must then compile the relevant documents, including W-2s and payroll records, in order to file for a Form 941 claim. Once an employer has determined and filed a Form 941 credit amount, they can confirm their response on line 19 of their quarterly return.

It’s important to note that employers cannot claim both the ERTC and Payroll Tax Credits at once; they must choose one or another depending on which one will provide them with more assistance during hard times. The guide provided by our IRS aims to help employers make an informed decision when choosing which one is right for their business. It also includes information about how much of each tax credit an employer can receive based on total wages paid during applicable periods in 2021.

Claim the credit on your annual tax return

Claiming the Employee Retention Tax Credit (ERTC) on your annual tax return is a simple process that can yield big savings. The ERTC was established by the CARES Act to encourage employers to keep workers on their payroll during the pandemic so that employees could continue to receive income, health insurance benefits and unemployment insurance in times of distress.

The ERTC provides refundable tax credit up to $5,000 per employee, depending on employer size and adjustment calculations. The credit is available for wages paid in 2020 or 2021, so it is important to calculate and submit proof of your tax credit eligibility when filing your annual business income taxes.

In order to claim the Employee Retention Tax Credit (ERTC) on your annual tax return you will need to provide:

• Supporting evidence including payroll documents and historical information about wages paid for each qualifying employee for the period in which you are claiming the credit.
• All qualifying documents associated with the calculation of their allowable credits throughout the entire claim process.
• File Form 941 quarterly wages and taxes reports.
• File an IRS 7216 disclosure form.
• File their annual income taxes along with any special forms that may be required by their state department of revenue.
• File any final adjustments or corrections related to taking this federal tax deduction within one year from when they have originally applied for this credit.

Additional Resources

It’s important to stay informed on the most up-to-date resources when it comes to Employee Retention Tax Credit (ERTC) 2021. There are many publications and websites that provide helpful information on the program, including the IRS website and the Small Business Administration’s website. Additionally, there are numerous financial advisors, CPAs, and other professional services who have experience working with employers to understand the program and maximize their benefit.

This section will provide a comprehensive list of additional resources to help employers apply for the ERTC 2021:

• IRS website
• Small Business Administration’s website
• Financial advisors
• CPAs
• Other professional services

IRS website

The Internal Revenue Service (IRS) website is a valuable resource for businesses looking to learn more about the Employee Retention Tax Credit (ERTC). Businesses may visit http://www.irs.gov/erc to find a wealth of information and resources related to ERTC eligibility, filing instructions, and frequently asked questions.

All businesses should thoroughly familiarize themselves with this information to ensure that their application for the ERTC is in compliance with all applicable requirements.

The IRS also provides an online tool called the Employee Retention Credit Administrator Inquiry Tool, or ERCAIT. This useful tool helps employers to determine quickly if their business qualifies for the ERTC and assists them in calculating their prospective credit amount based upon current wages paid and other criteria. The IRS maintains additional guidance through its Publication 511, Taxable Income which should be read carefully before preparing and submitting any application for the ERTC program.

Organizations may also sign up for communication from the IRS related to news on ERTC, including alerts when updated forms or procedures become available. All businesses are cautioned that tax regulations are subject to change without prior warning and should check back regularly with this website as they prepare their applications and review any updates that might affect their submission of an ERTC request.

IRS FAQ page

The Internal Revenue Service (IRS) has an FAQ page for the Employee Retention Tax Credit (ERTC). The page provides a wealth of information about eligibility and filing requirements for the credit. For example, it provides an overview of which employers qualify and what wages are eligible for inclusion in determining the credit amount. It also contains information on how to apply for, estimate, and claim the credit, as well as guidance on when to revise a previously filed claim.

Additionally, the page offers helpful resources such as FAQs specific to nonprofits, contact information for regional IRS offices, resources related to calculating wages that are eligible and excluded from the credit calculation, and more. Those interested in learning more about the ERTC should visit IRS’ ERTC FAQ page.

State websites

The government requires employers to access their local state website as a first step when attempting to apply for the Employee Retention Tax Credit 2021. Depending on each state, the process may be different. It is important for employers to refer to the correct website for their area for information on specific details and requirements.

State websites are available online and are organized according to geographical area, including US states and territories, Canada, and US military locations around the world. Employers who are members of unions or other labor organizations should contact those groups directly for more information regarding employee retention tax credit eligibility.

Moreover, businesses with multiple locations should be sure to check each applicable site individually since some credits are applied differently in different states. Employers should also be aware that some states don’t offer ERTC at this time but may do so in the future, so it is important to check back periodically if they find they aren’t eligible initially but didn’t give up hope of receiving financial support from the program.

Businesses looking into applying for Employee Retention Tax Credit 2021 should go here or contact their local state revenue office in order to gain access to necessary forms and instructions as well as other important guidelines that must be followed when submitting an application. Here is a link providing examples of some websites specific to different states here. If you have any further questions please don’t hesitate contact our representatives at [email protected].