Overview of the Employee Retention Tax Credit
When the Coronavirus pandemic hit, the US government introduced the Employee Retention Tax Credit (ERTC) to provide financial relief to small businesses and employers affected by the crisis. The ERTC is a two-year incentive that is designed to help employers keep their employees onboard and keep their businesses afloat during extraordinary times.
In this article, you will get an overview of the ERTC and how you can claim the retroactive credit for the tax years 2020 and 2021.
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable federal income tax credit issued in response to the Coronavirus pandemic. The ERTC is designed to help businesses retain their employees during the pandemic by providing them with a tax credit of up to $5,000 per employee for wages paid between January 1, 2020 and June 30, 2021.
The purpose of the ERTC is to provide employers with an incentive to keep their employees on payroll during difficult economic times. This can include a reduction in hours or wage reductions due to business hardship caused by the pandemic. In addition, the ERTC allows employers to receive more than one credit for different qualified wages paid over various times throughout 2020-2021.
Qualifying employers are eligible for a refundable tax credit for 50% of qualified wages up to $10,000 per employee total for all quarters in 2020 and 2021. Eligible employers include those whose gross receipts declined by more than 20%, those experiencing a full or partial government closure mandatory by government orders due to COVID-19, or those whose gross receipts decreased more than 50% compared with 2019 fourth quarter gross receipts. The IRS released guidelines Thursday March 11th allowing qualifying employers – regardless of size – that took advantage of PPP loans in 2020 or 2021 would not be excluded from being able to claim both credits at once on their taxes without having one offset the other. If both are claimed, only wages which have not been used as eligible expenses under the PPP may qualify as “qualified wages” under this program and thus be eligible for the ERTC Additionally if an employer qualifies they may also claim a tax credit when they incur health plan expenses related healthcare benefits even when no wages are paid out such as those incurred while employees are furloughed without pay or not working due reduced hours of operations or operations must be completely suspended due occurrences related direct and effects caused by businesses being closed as direct result of COVID-19 health emergency related governmental regulation/mandates.
Who is eligible for the credit?
The Employees Retention Tax Credit (“ERTC”) is available to employers of all sizes who have experienced economic hardship and revenue declines due to the coronavirus pandemic. Eligible employers must have operations partially or fully suspended by a government order, or must have seen a significant decline in gross receipts compared to the same calendar quarter in 2019.
In order to be eligible, employers must still pay their workers and employees throughout the credit period from March 13, 2020 to January 1, 2021. The IRS recently clarified that employers can now claim retroactive ERTC for wages paid for any quarter of 2020 despite whether the employer was eligible to receive ERTC at the time that those wages were paid. The maximum allowable credit is $5,000 per employee for each quarter of 2020 and 2021 combined.
Self-employed individuals are not currently eligible for this tax credit but may qualify in 2021 for a new Credit for Sick and Family Leave mandated by the Families First Coronavirus Response Act (FFCRA).
Steps to Claim the Credit
The Employee Retention Tax Credit (ERTC) was included in the Consolidated Appropriations Act to help small business owners during the COVID-19 pandemic. The credit can help employers defray the costs of keeping their employees on the payroll. It provides eligible employers with a refundable tax credit based on a portion of the wages paid to employees.
Here are the steps for employers to claim the Employee Retention Tax Credit:
- Determine eligibility.
- Calculate the amount of the credit.
- Claim the credit on the employer’s quarterly tax returns.
- Receive the credit as a refund or reduce the employer’s tax liabilities.
Calculate the amount of the credit
To calculate the amount of your credit, first add up the total amount you paid in wages (up to $10,000 for each eligible employee) for the period from March 12, 2020 through December 31, 2020.
You can then multiply the amount of wages by 50% to determine your estimated credit. Keep in mind that this credit is nonrefundable; it will reduce taxes you owe but won’t result in a refund. The maximum Employees Retention Credit you can claim is $5,000 per eligible employee over the entire taxable year.
For employers with 100 employees or fewer who have faced a partial or full suspension of their activities due to a governmental order that limits commerce, travel, or group events due to coronavirus crisis (COVID-19 pandemic), there is an alternative calculation for calculating the credit available:
- If your business falls within these parameters: Eligible wages paid between March 12th and June 30th are multiplied by 70% instead of 50%. Eligible wages paid between July 1st and December 31st are multiplied by 60%. Keep in mind that any wages used for calculating this alternative method cannot be used to calculate the normal method described above and vice versa. Any combination of methods must not exceed $10,000 not exceed $5,000 per employee during the year-long period ending on December 31, 2020.
File Form 941-X
To claim the employee retention tax credit for eligible wages and qualified health plan expenses paid after March 12, 2020 and before January 1, 2021, you must file an amended Form 941-X. For each quarter you can claim the tax credit, you should file separate Forms 941-X. The credits are then used either to reduce your payroll taxes or it may be refundable if the employer pays more W-2 wages during 2020 than they paid during the same calendar quarter in 2019.
You should first apply any withheld federal income tax deposits to any other federal employment taxes due (such as FICA). After that, any remaining balance of withheld federal income taxes may be refunded or applied towards payroll tax deposits into 2021. Once your Form 941-X is processed, you will receive a statement from the IRS summarizing how much of your employee retention credits have been allowed or disallowed.
Form 941-X includes:
- Employer’s name and EIN
- Type of return you are filing
- Calendar quarter for which you are making adjustments or corrections
- Total number of eligible employees reported on Line 10
- Amount claimed on Line 17a & 17b
- The total amount the employer intends to carry back to the previous quarters (if applicable)
- Signature and date
Claim the credit on your quarterly tax return
Claiming the Employee Retention Tax Credit on your quarterly tax return is a simple process. After calculating how much credit you’re eligible to receive, enter:
- The total credit amount;
- The portion of the credit that applies to wages paid in this quarter; and
- The portion of the credit that applies to wages paid before this quarter
on form 941, your quarterly tax return form. You should also include your Employment Identification Number (EIN) and the name of the responsible party who is filing this claim on Line 3b of Form 941.
You will report how much of the tax credit was used for each qualifying employee by entering it on line 10c, Form 941 for the current quarter once you have received any excluded wages refunded to you by other programs or refunds associated with payroll taxes. Finally, make sure to keep all relevant documentation as substantiation in case you are audited by the IRS at a future date.
Documentation Needed to Claim the Credit
Claiming the Employee Retention Tax Credit (ERTC) can be a complicated process, with many forms and requirements. One important part of the process is the documentation that needs to be provided to the Internal Revenue Service (IRS) when claiming the credit.
In this article, we’ll look at what documents are necessary to claim the credit, and how to ensure they are all submitted correctly:
Documentation to support wages paid
In order to claim the Retroactive Employee Retention Tax Credit, employers must keep records of wages paid and other payments made in 2020 that qualify. Employers should collect and preserve both payroll tax documents and any other documentation relevant to payments made.
When filing for the tax credit, employers must retain documentation demonstrating:
- The amount of qualified wages paid for each quarter during 2020
- The total amount of qualified health plan expenses borne by the employer during 2020;
- Eligibility for full or partial suspension of business operations under government orders due to COVID-19 during the calendar quarter, or a significant decline in gross receipts compared to the same quarter in 2019.
Documentation that may be retained includes, but is not limited to:
- Payroll records (including individual payroll statements);
- Receipts from vendors;
- Bank statements/cancelled checks;
- Insurance premium statement/invoices and explanations of benefits/explanations of coverage;
- Allocation of casualty insurance losses due to COVID-19; and
- Calculations related to a significant decline in gross receipts.
Documentation to support a full or partial suspension of operations
Documentation to be gathered in order to demonstrate a full or partial suspension of operations as required by the Employee Retention Tax Credit in order to claim the tax credit includes information documenting that:
- The taxpayer suspended or fully or partially limited its operations due to governmental orders related to COVID-19;
- The taxpayer experienced a significant decline in gross receipts during any calendar quarter in 2020 as compared to the same calendar quarter in 2019.
In order to demonstrate full or partial suspension of operations, taxpayers should keep copies of documents issued by a federal, state, or local government authority temporarily ordering businesses like yours—in whole or in part—to suspend normal operation due to the effects of COVID-19. As an example, this may include government prohibitions concerning distancing, social gathering limits, work-from-home orders, customer limitations at business locations, etc., as well as relevant guidance issued by an authority. Taxpayers should also gather evidence showing they made efforts both before and during 2020 to limit payroll and other expenses while not operating at normal levels. In particular, evidence may include:
- Copies of any notices sent to employees regarding layoffs or furloughs;
- Documentation showing adjusted employee salaries and hours that were implemented;
- Documentation of benefits forgone; and/or
- Records reflecting full payment for employees retained despite reduction of hours worked.
Supported documentation should include sufficient detail regarding how operations were impacted by governmental orders from which a reasonable inference can be made on how operations were impacted during the 2020 calendar year when compared with preceding years. Additionally, for purposes of calculating an expected decline in gross receipts based on significant declines outside those normally experienced by similar taxpayers will require documents such as:
- Historical financial statements including balance sheets and income statements;
- Copies of past bank statements indicating pertinent timeframes reporting balances prior and subsequent receipt of loan proceeds under Small Business Administration programs such as EIDL Advance Loans and/or Paycheck Protection Program loans;
- Reports from vendors providing relevant services; and/or
- Comparison profitability reports between 2019 calendar year and 2020 Calendar year covering all applicable business entities within the legal structure filing ERTC related Form 941’s
Are you looking for information and resources regarding the Employee Retention Tax Credit? The IRS has several helpful resources to help you determine if you qualify or not. This section will talk about the various IRS resources that are available to help you understand and claim the Employee Retention Tax Credit. Let’s get started.
The U.S. Internal Revenue Service (IRS) has many resources available to help individuals and businesses understand how to claim their employee retention tax credit (ERTC). The ERTC is a federal tax credit available to employers who temporarily reduce or suspend wages and salaries due to circumstances related to the COVID-19 pandemic.
Information about the ERTC can be found on the IRS website. The site includes forms, instructions, videos and other resources that explain eligibility requirements, how to calculate your credit amount and how to claim your credit on your business income tax return. Additionally, a link for questions and answers is available which provides answers to frequently asked questions.
Also on the IRS website, employers may find publications such as Taxable Benefits for Employers & Employees and Small Businesses & Self-Employed Tax Center which provide helpful information about related topics such as benefits for employees, taxes for businesses, filing taxes electronically and correspondence with the IRS. Lastly there are general informational topics that offer tips on protecting your business from identity theft or phishing schemes involving imposters posing as representatives of the IRS in emails or phone calls requesting sensitive information.
The Internal Revenue Service (IRS) provides information and guidance on claiming the Employee Retention Tax Credit, a refundable tax credit available to eligible employers whose businesses were closed or financially impacted by COVID-19. IRS FAQs can help employers understand the details surrounding the credit, including eligibility requirements and limits on qualifying wages that can be used to calculate it.
Additionally, IRS FAQs can help employers learn more about how wages for certain employees must be considered for the purpose of calculating the Employee Retention Tax Credit. For example, under some conditions, wages paid to certain furloughed employees may not qualify for the credit if they are not regularly scheduled and Customarily employed in a position with a duration of more than one year.
The IRS also provides guidance on retroactive claims for employers who have already taken advantage of other relief options such as the Paycheck Protection Program (PPP). Employers who have previously claimed PPP loans are still eligible to claim an Employee Retention Tax Credit under some circumstances. The details regarding how this interaction works between two separate taxpayer relief provisions is included in IRS FAQs available online.
Lastly, IRS FAQs also offer helpful information on how employers should document their claims when filing federal income tax returns using Form 941 or Form 8244-VIRS. This documentation is key since it helps establish eligibility and accurately calculate the value of any retroactive credits claimed by individual taxpayers or businesses alike.
IRS publication on the Employee Retention Tax Credit
For employers affected by the COVID-19 pandemic, the Employee Retention Tax Credit (ERTC) is a key provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act. The ERTC gives eligible employers a refundable tax credit against the payroll taxes equal to 50% of wages paid up to $10,000 per employee.
The IRS has published guidance regarding how to take advantage of this valuable credit. IRS Publication 15-A provides an overview of how to claim the ERTC, including information on:
- Eligibility requirements;
- The amount of qualified wages that can be considered;
- How wages are allocated between calendar years;
- How the new law affects prior credits such as those under section 3111(b)(8);
- What records must be kept for substantiation; and
- The impact on other laws, regulations or statutes.
Fortunately, employers who have met all eligibility requirements can receive retroactive benefits from the CARES Act and may be able to recover some expenses incurred in 2020 related to responding to COVID impacts. It’s important for employers to review their situation carefully and make sure they’re taking advantage of all available benefits – including claiming eligible wage credits for 2020 and 2021 qualifying wages paid in order to maximize their employee retention value.