The Employee Retention Tax Credit (ERTC) is a tax credit aimed at helping employers impacted by the COVID-19 pandemic to retain their employees. To claim the ERTC, employers must file IRS Form 941-X with their quarterly Form 941. This article will provide a comprehensive overview of Form 941-X, including:
- Instructions on how to complete the form
- Eligibility requirements
- Other important information
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a U.S. federal income tax credit available to businesses in an effort to incentivize them to keep their employees on their payrolls as the COVID-19 pandemic continues to impact the economy. Eligible employers can receive up to 50% of qualified wages up to $10,000 per employee for wages paid from March 13 through December 31, 2020. Employers must calculate their credit using IRS Form 941-X and submit it with Form 941 Employer’s Quarterly Federal Tax Return.
In order to be eligible for the ERTC, employers must:
- Have operations that were either fully or partially suspended due to coronavirus related orders from a governmental authority or experienced a significant decline in gross receipts of at least 50% compared with the same calendar quarter in 2019.
- Have been operating/active prior to February 15th 2020 and are currently paying qualified wages and maintaining employee count levels despite business disruptions due to COVID-19 related circumstances.
Who is Eligible for the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is an incentive created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help employers retain employees during the economic crisis caused by coronavirus (COVID-19). This credit is available to all employers – even those who have not been directly affected by the pandemic. To claim this credit, employers should use Form 941x.
Who is eligible? Eligibility for the ERTC depends on whether your organization was fully or partially suspended during the relevant period due to government action or if you experienced significant gross receipts losses during a period as compared to previous years.
- For organizations that were fully or partially suspended due to government orders, any amount paid for Qualified Wages paid between March 12, 2020 and March 11, 2021 are eligible for a refundable tax credit of 50%. Qualified wages include wages paid after an employee is furloughed or laid off but must be more than $10 per hour on average. Employers with greater than 100 full-time employees in 2019 must reduce wages they pay in 2020 to claim this tax credit, but employers with less than 100 full-time employees in 2019 may still choose to reduce wages.
- For organizations that experienced significant gross receipts losses during a period as compared to prior years, any amount paid for Qualified Wages paid between January 1, 2020 and June 30, 2021 are eligible for a 50% refundable tax credit and limited up to $5K per employee annually. The wages cannot exceed $10/hour and cannot exceed employee’s normal permit remuneration amount from prior periods. Furthermore, organizations that qualified for this category must have had operational issues during the same quarter each year before 2020 due to which there was a 75% fall of revenue account.
How to Claim the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a federal tax credit that employers can claim to help with their costs related to retaining employees during the COVID-19 pandemic. To claim the credit, employers must file Form 941-X with the Internal Revenue Service (IRS).
This article will provide step-by-step instructions on how to claim the Employee Retention Tax Credit using Form 941-X:
File Form 941x
The Employee Retention Tax Credit (ERTC) is a tax credit available to employers affected by the COVID-19 pandemic. The credit can be applied toward employer Social Security taxes. To claim this credit, employers must file Form 941x with the IRS to adjust their deposits and/or payments of employment taxes for periods throughout 2020.
Form 941x must be completed as an “Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund” and submitted with a copy of the relevant W-2 wage statements for the same period. It is important to note that Form 941x can only be used to adjust deposits and/or payments of employment taxes from a prior quarter. The adjustments cannot be used to make a payment on an employment tax return for the current quarter or any future quarter; instead, those taxes must be reported and paid using Form 941, Employer’s Quarterly Federal Tax Return or Form 945, Annual Return of Withheld Federal Income Tax.
When filing Form 941x, employers should use either:
- Line 17 to claim an employee retention credit
- Line 24 if they are amending a prior period return that has already claimed the employee retention credit.
Additional information regarding eligibility requirements and computation rules can be found on the IRS website or by contacting your tax professional.
Calculate the credit
The most important step to claiming the Employee Retention Tax Credit is calculating how much of a credit you can claim when filing your Form 941X. Your total credit amount will be determined by the number of employees employed during the eligible period, as well as their wages paid under certain qualifications.
The credit is 50% of qualified wages, up to a maximum of $5000 per employee for any quarter. For groups of employees, you may also qualify for a limited additional credit in determining the amount that can be claimed for each quarter. To claim this limited additional credit, there are three separate calculations required which are based on group size and wages paid:
- Qualified Wages Calculation – This calculation will determine how much an employer paid in qualified wages in excess of 80 hours but not more than 130 hours for each employee during a specific calendar quarter for purposes of claiming the credits outlined in section 51(a) and 52(a) of Code (Internal Revenue).
- Adjusted Hours Calculation – This calculation determines what percentage of an employer’s income was derived from work-related sources during the period included in the taxes to be credited.
- Limited Additional Credits – These credits are available if an employer pays more than one qualifying employee, or has multiple entities or sections being reported on Form 941x. The calculations that must be carried out to determine if you qualify and how much you may claim are outlined in Publication 15-A (Employer’s Supplemental Tax Guide).
It is important to note that your total credit amount is capped at $9000 per employee for 2020 and 2021 combined. Additionally, calculations should take into account any other applicable state or local taxes based on place where you operate and other areas pertinent to your business operations.
Claim the credit on Form 941
The Internal Revenue Service (IRS) requires employers to claim the employee retention tax credit using Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return. If you are eligible for and taking the credit, you will complete this form in addition to Form 941, Employer’s Quarterly Federal Tax Return.
Employers must complete Form 941-X for each quarter for which they are claiming the tax credit. To claim the Employee Retention Credit, employers check the box indicating that amount that is being claimed for qualified wages and qualified health plan expenditures to reduce their employment taxes. The IRS also allows employers to check a box that indicates that all liabilities reported on Form 941, line 10 are refundable because of the Employee Retention Credit and any advance payments made during the quarter with respect to such liability should be refunded. Additionally, there is a section requiring employers to attach applicable payroll reports so that they can document their retention credit calculations.
On conclusion of this form, if an employer has net overpayment of taxes due ($100 or more), they may have an option of applying it towards estimated taxes for subsequent quarters or requesting a refund from IRS. Once you select your desired option on page three of this document, submit it along with page four, certified payroll reports documenting your wages and health care costs with other required documentation as specified in Schedule R (Form 941), Allocation Schedule For Aggregate Form 941 Filers.
Claiming the employee retention tax credit can help eligible employers and self-employed individuals keep their workforce while dealing with the economic impacts of the coronavirus pandemic. In order to claim the credit, you must submit Form 941x along with the appropriate documentation. We’ll discuss the documentation requirements in detail in this section.
Documentation of Eligibility
To claim the Employee Retention Tax Credit, you must retain documentation that demonstrates that you are eligible for the credit. You must also provide certain documentation to back up your claims on Form 941x. Depending on the broader category to which you belong, there are different requirements.
Businesses – Those who file an annual return and are certified by the SBA as an eligible recipient of assistance under 31366:
- Copy of certification of business as an eligible recipient for assistance under 31366
- Statement from the treasurer or another officer responsible for financial matters certifying that: (1) during 2020, their trade or business was fully or partially suspended due to governmental orders limiting commerce, travel, or group meetings due to COVID-19; and (2) their gross receipts from prior calendar quarter significantly declined from same calendar quarter in 2019 in order qualify for Employee Retention Tax Credit.
Tax exempt organizations – 501(c)(3) organizations certified by the SBA as an eligible recipient of assistance under 31367:
- Copy of certification of business as an eligible recipient for assistance under Section 41367
- Statement from treasurer or another officer responsible for financial matters certifying that: (1) during 2020, their trade or business was fully or partially suspended due to governmental orders limiting commerce, travel, or group meetings due to COVID-19; and (2) their gross receipts from prior calendar quarter significantly declined compared with same calendar quarter in 2019 in order qualify for Employee Retention Tax Credit.
Documentation of Amount of Credit
In order to properly claim and receive an Employee Retention Tax Credit using Form 941x, employers must provide supporting documentation that reflects the amount of credit they are claiming. Documentation required includes payroll information and/or other evidence that verifies the amount of qualified wages, health care expenses incurred, and their related qualified health plan expenses paid to or on behalf of their employees in 2020.
Generally accepted types of documentation used for this purpose include:
- Employee wage records
- Payroll tax filings
- Allocation schedules for wages or health care expenses
- Third-party payer reports
- Documentation from an accountant who has reviewed employee wage records
- Other documents as requested by the IRS.
Employers should keep these supporting documents for at least three years from the date of filing Form 941x in order to verify any claims made during future IRS audits or reviews.
Tips for Claiming the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a valuable benefit available to employers affected by the coronavirus pandemic. It helps reduce the amount of taxes employers owe by providing a refundable tax credit of up to $5,000 per retained employee. To claim the ERTC, employers must submit Form 941x to the IRS.
In this guide, we’ll provide some tips on how to properly do this:
Understand the rules and regulations
Employees are eligible for the Employee Retention Tax Credit if they meet certain conditions. The employer must retain employees at the same wages as if not for COVID 19 and reduce hours or wages due to business loss. To make a claim, employers must have met two of the three following criteria:
- Experienced a full or partial suspension of operations due to a governmental order related to COVID-19;
- Had either:
a) A significant decline in gross receipts (at least a 50 percent drop when comparing quarters in 2020 to 2019); OR
b) Had gross receipts below specified thresholds ($1,000,000 or $500,000 when averages over 2020 – 2021)
- Paid employees’ wages even though operations were suspended or gross receipt were reduced.
Additionally, employers can claim the payment for any calendar quarter during which there was an increase in both total employees retained compared to the previous quarter and in total wages paid as compared with the previous calendar quarter. Finally, employers claiming this credit cannot also claim updates on payroll tax relief such as net operating losses and credits carried back from taxable years beginning after December 31, 2019 under section 55(d). Employers should be cautious when pursuing these changes as they may be considered an abuse of rules set forth by Treasury Regulations and the IRS.
File on time
Timely filing with Form 941X is critical when claiming the Employee Retention Tax Credit. The form must be submitted by the due date of the employer’s quarterly Form 941 filing. For example, if your company is claiming the credit for the 2nd quarter, you must file your amended return by July 31st in order to get it considered in time. If you miss this deadline, the credit will be denied and can’t be claimed at a later date.
In some cases, filing an extension for your quarterly return may also allow for an extra couple of weeks for submitting Form 941X and claiming the Employer Retention Tax Credit. Be sure to check with your tax professional about any potential opportunities for extending your deadlines when applicable.
It’s also important to follow all applicable filing rules and regulations when submitting Form 941X—otherwise it may not be accepted or processed in time and may delay receiving funds from any related employee tax credits that are due. Read through IRS Publication 15 (Circular E) and other related documentation carefully before getting started, so that you’re confident that all relevant procedures are followed correctly and completely on time.
Keep records of all transactions
Retaining your employees is the objective of the Employee Retention Tax Credit (ERTC), but exact details are also necessary. In order to qualify, your business needs to keep accurate and up-to-date records of all employees you retain during the qualifying period. Be sure to document:
- Overall number of employees retained
- Salaries paid to retained employees for qualified wages
- Amounts claimed for reductions in Social Security tax per employee
- Paycheck Protection Program loan amounts claimed
In addition, businesses must provide a clear explanation on how they allocated wages between qualified wages and nonqualified wages. By keeping good records, it will be easier for your business to accurately claim the ERTC when filing your taxes. Additionally, the IRS may request information to verify eligibility and report payment received from the credit. Taking time now can help ensure that you receive all benefits from this tax program.