How to File Employee Retention Tax Credit?

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Overview of the Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) is a tax break for employers that was established by the CARES Act and is designed to help businesses that have either experienced reductions in gross receipts or have been ordered to close or partially suspend their operations due to COVID-19. This tax break is applied to reduced income and wages, allowing businesses to recoup lost revenue.

In this article, we will provide an overview of the ERTC, explain how to calculate it, and how to file it.

Eligibility Requirements

In order to be eligible for the Employee Retention Tax Credit, employers must meet several criteria. Employers must have experienced either a full or partial suspension of operations due to government orders related to COVID-19, or have experienced a significant decline of gross receipts.

The rules regarding what qualifies as a “significant decline” in gross receipts vary depending on an employer’s size. For employers with more than 100 full-time employees for 2019, a significant decline is defined as having 2020 gross receipts of less than 80% of their 2019 gross receipts (averaged over quarters). Employers with fewer than 100 employees are subject to less stringent requirements; they must demonstrate that their 2020 gross receipts declined by more than 50%.

Employers with average payroll costs of less than $4 million during the year may qualify for the credit even if their operations were not fully or partially suspended due to government orders related to COVID-19, so long as their gross receipts decreased by more than 20% in any quarter compared to the same quarter in 2019.

In addition, eligible employers cannot make use of other tax credits based on wages paid in 2020 unless these credits are specifically designed for small businesses such as the Paycheck Protection Program loans (PPP). Eligible employers may still receive other grants and loans available through the U.S. Small Business Administration’s loan program (not including PPP loans) without disqualifying themselves from the Employee Retention Tax Credit.

How to Calculate the Credit

The Employee Retention Tax Credit is available for employers whose businesses have been adversely affected by the coronavirus pandemic. The credit is based on the employer’s qualified wages paid and the number of employees retained. To calculate the credit, you will need to determine your eligible wages and allocate them across your qualifying employee categories.

Eligible Wages: Qualified wages are generally any compensation up to $10,000 that is paid in 2020 to an individual by an entity for providing services related to an eligible trade or business, including qualified health plan expenses allocable to such wages. This includes gross cash payments, vacation pay, holiday pay, severance pay and sick leave (calculated on a per employee basis), as well as payments made through a third-party payroll provider, provided these types of payment meet certain requirements. Any type of supplemental wages (e.g., bonuses) are not eligible for this credit unless one of the conditions outlined in IRS Notice 2020-22 is met.

Allocation of Wages: To calculate your credit amount, you will need to allocate allocating qualified wages across employees in two different categories – full-time vs part-time – according to certain criteria outlined in IRS Notice 2020-22:

  • Full Time Employees – A full time employee is considered one who works at least 40 hours per week (or 120 hours/per month if that applies). For a full time worker employed throughout 2020, each calendar quarter’s wages up to $10K/$4000 per employee can be allocated towards the Employee Retention Tax Credit claim total in accordance with their percentage relative to total quarter earnings of all full time employees during that quarter ($20K divided among 4 individual employees = $5K each).
  • Part Time Employees – Part time workers must receive compensations at least commensurate with what they earned on average during 2019 or be counted towards nonqualified employee count limit($5000 lifetime maximum wage allocation per part time worker). For example: An employer only has 8 part time workers but allocates more than ~$40K towards their ERC claim; when dividing W2 Box 1 earnings evenly across those eight individuals only 7 would qualify for the benefit because 8 * $5000 = $40K which exceeds their ERC claim amount maximum limitation threshold ($100K for employers with less than 100 FT employees). Note that if any remaining excess wage amounts are applied towards nonqualified individuals after exceeding ERC limits those amounts may still qualify as deductible business expenses post allocation adjustments.

Application Process

In order to file for the Employee Retention Tax Credit (ERTC), employers must first fill out an application form and submit it to the IRS. The form must include information about the business, the number of employees employed, and the wages paid.

The application process for the ERTC requires employers to provide documents and other information to the IRS. This section will discuss the process of filing for the Employee Retention Tax Credit.

Filing Form 941

Filing Form 941, Employer’s Quarterly Federal Tax Return, is an important part of the application process. This form is used to report the wages you paid your employees and the taxes withheld from their pay for the quarter. The IRS requires employers to file Form 941 every quarter and it must be filed by the end of each calendar quarter.

When filing Form 941, you will need to provide information such as federal wage payroll data, federal income tax payments (FIT), social security taxes collected and health insurance costs for your employees for that period. You can find all necessary information about filing the return in sections 1 through 8 of this form. All areas not applicable to you should be marked as N/A or left blank when completing your form 941. Additionally, make sure that you always use the most recent version of this form as they can change year by year.

When it comes time to file your tax returns electronically, there are several options available to employers. You can e-file Form 941 through an approved IRS electronic filing provider or use approved software programs which are available on major tax preparation websites and at many business supply stores. Whichever option you choose, make sure that you understand employer’s responsibilities related to quarterly income tax reporting before downloading a program or filing electronically – mistakes could result in costly penalties from the Internal Revenue Service (IRS).

Filing Form 941-X

Form 941-X is the form that businesses must file in order to claim their employee retention tax credit. It must be used to make any corrections to wages or deposits reported on previously filed Forms 941, Employer’s Quarterly Federal Tax Return. The IRS provides this form for filing employee retention credit claims, so it is important for employers to review the instructions and complete the form accurately.

Form 941-X includes five key components – Revenue & Expense Sections, Credit Computation, Workforce Summary Table, Line 13 Reduction Summary Chart & Credit Certificate Codes Section. The Revenue & Expense Sections are used to determine earnings that qualify for the Employee Retention Credit (ERC). The Credit Computation section is used to calculate the amount of ERC allowable. The Workforce Summary Table shows both full-time and part-time employees employed by the qualified business during each calendar quarter in 2020 and 2021. It provides a premier snapshot of a company’s workforce as it relates to claiming the Employee Retention Credit. The Line 13 Reduction Summary Chart provides supporting documentation on qualified wages claimed as a result of claiming the ERC – this must be completed in order for Form 941-X to be accepted by the IRS. Finally, the Credit Certificate Codes section indicates which calculation method was used when computing qualifying wages and deposits (calendar quarter versus non-calendar quarter).

Filing Form 941-X correctly can help employers secure their tax credits quicker. Employers should thoroughly review each part of Form 941-X before submitting it as any potential errors may delay approval from the IRS or lead to further complications during an audit or examination later on down the line.

Documentation Requirements

The Employee Retention Tax Credit (ERTC) is a great way for employers to get relief from payroll taxes caused by the COVID-19 pandemic. However, there is an extensive amount of paperwork and documentation required to file for the credit.

This section will cover all the necessary documentation that needs to be included in order to receive the credit:

  • Proof of Eligibility
  • Employment Verification
  • Tax Identification Number
  • Payroll Records
  • Financial Statements

Documentation for Eligibility

When filing for an Employee Retention Tax Credit (ERTC), employers must keep complete, accurate records and be prepared to provide evidence of their eligibility for the credit. This includes records documenting payroll expenses, hours worked by employees, and compensation for each employee (including employed separate from wages such as tips).

Documents may include:

  • Payroll reports
  • Payroll summaries
  • Quarterly wage transcript reports
  • Pay stubs
  • Tax returns from prior tax years
  • Copies of applicable Form 941 and Form 944 filings
  • State unemployment insurance wage reports and corresponding tax filings
  • Payer summary reports with respect to state unemployment insurance taxes imposed for all calendar quarters in 2020 or 2021

Additionally, employers who use a third party payer such as a payroll service provider must provide documentation indicating that the necessary amounts were both paid to the third party and reported on Form 941 or Form 944. This could include invoices, check register entries, or any other supportable documentation showing proof of payment.

Documentation for Calculating the Credit

In order to calculate the Employee Retention Tax Credit, employers must maintain documentation to support their claims. The necessary documentation will vary depending on factors such as the size of the company, its payroll expenses and prior access to other forms of relief. However, employers are generally responsible for maintaining records and documents demonstrating:

  1. The total number of employees employed during the tax period;
  2. The total amount paid in cash remuneration;
  3. The applications for available relief that were approved or denied;
  4. The work related status of employees who have been laid off or furloughed;
  5. The length of any periods when their operations were fully or partially suspended due to a governmental order during 2020;
  6. Any medical expenses that qualify as a wage expense; and
  7. Any leave taken by employees who have remained employed throughout 2020.

Additionally, employers should maintain payroll documents that substantiate wages, such as employee time cards and wage reports. Employers should also hold onto tangible evidence regarding any government orders that restricted operations in 2020. Employers should seek assistance from tax advisers to ensure they have compiled required documentation adequately for IRS scrutiny.

Additional Resources

Filing employee retention tax credit forms can be quite a complicated process. Fortunately, there are many helpful resources available to help employers better understand the program and ensure they are following the correct process.

In this section, we’ll review some of the additional resources available to help employers file the ERTC paperwork:

IRS Website

The Internal Revenue Service (IRS) website offers helpful information on filing for the Employee Retention Tax Credit. It includes FAQs about eligibility and applying for the credit as well as specific detailed instructions on how to do so. The IRS website address is http://www.irs.gov and it has various updated guidance documents regarding ERTC, including “Questions and Answers About the Employee Retention Tax Credit” and “How to Claim the Credit”.

Additionally, if employers have specific questions they may contact an IRS operator at 1-800-829-1040, who can provide information related to the ERTC filing process.

It is important to note that employers must make sure they file their taxes correctly when submitting a claim for ERTC since mistakes could cost them money in penalties or cause delayed payments from refunds due. Furthermore, employers should make sure they are aware of all updates and changes that occur as it relates to filing for employee retention tax credit.

IRS Taxpayer Guide

The US Internal Revenue Service (IRS) provides a Taxpayer Guide to Employee Retention Credits that can help employers understand how to claim the new tax credit. The guide outlines eligibility requirements, how the credits are calculated, filing options and other useful information. Employers should always consult a tax professional prior to claiming any credits or deductions on their taxes.

The IRS Taxpayer Guide includes an overview of the Employee Retention Credit and provides step-by-step guidance for calculating the creditable amount. Examples of qualified wages eligible for the credit are highlighted, as well as details about qualified hiring and health plan expenses that can be included in certain circumstances. The guide also includes an FAQ section with answers to some common questions from employers, such as how the employee retention credit interacts with other relief programs like Paycheck Protection Program (PPP) loans or Unemployment Insurance benefits. Additionally, employers are instructed how to file Form 941-X: Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund when claiming this tax credit.

IRS FAQs

The Internal Revenue Service (IRS) provides helpful answers to common questions about employee retention tax credits. Employers that qualify for the Employee Retention Credit (ERC) should become familiar with the IRS website and all of its related resources. This page provides links to these resources and offers some brief highlights of what information is available.

IRS FAQs
The IRS frequently asked questions page on the ERC helps employers answer a variety of employer related tax credit questions. These include topics such as eligibility requirements, how to calculate the amount of the credit, ineligibility rules, employee counts and more.

Other Resources
The IRS also provides access to a glossary of terms related to ERC, a list of IRS publications addressing credits and other business taxes, as well as recent developments on expanded credits allowed in response to COVID-19 relief laws. Employers can use these documents to help understand their rights and responsibilities under employment tax law.