Employer’s that receive Employee Retention Credit (ERC) must report the credit on their partnership tax return. This guide provides step-by-step instructions for completing the form as well as tips on how to avoid common errors.
The ERC is designed to reimburse employers for retaining employees by providing specified credits against employment taxes. The credit is generally equal to 50% of qualified wages paid after March 12, 2020 and before January 1, 2021 (up to $10,000 per employee). Furthermore, partnerships with 100 or fewer employees may be eligible for additional credits if they make payments to a self-employed individual.
In order to receive the ERC, employers must follow certain IRS requirements:
- Employers must complete Form 941, Employer’s Quarterly Federal Tax Return
- Employers must claim the credit on their Partnership Tax Return
- Employers must allocate any excess credits among partners
- Employers must provide relevant information concerning how the credit was determined
This guide will describe each step of these requirements in detail and provide solutions to common problems associated with filing returns related to ERCs.
Overview of the Employee Retention Credit
The Employee Retention Credit (ERC) was implemented by the CARES Act in order to help businesses retain employees during the coronavirus pandemic. It provides a refundable payroll tax credit for up to 50% of qualified wages for employers whose businesses have been severely impacted by the pandemic.
In this article, we’ll provide an overview of the Employee Retention Credit and how it can be reported on a partnership tax return.
In order to be eligible for the Employee Retention Credit, businesses must meet certain criteria and have experienced financial hardship due to the coronavirus pandemic. To qualify for this tax incentive, employers must show that their gross receipts have decreased by 50% or more when compared to either the same quarter from 2019 or a quarter prior to June 30, 2020. Businesses may also qualify if they have had operations partially suspended due to government orders related to COVID-19.
Another requirement is that the business must not receive a Small Business Administration Paycheck Protection Program loan after December 27, 2020. Furthermore, the impacted business must have had fewer than 500 full-time employees during 2020 in order to be eligible for the Employee Retention Credit. Finally, businesses claiming this tax credit cannot also claim The Families First Coronavirus Response Act’s payroll tax credit during the same quarters; doing so would disqualify them from receiving this benefit.
Calculation of the Employee Retention Credit
The Employee Retention Credit (ERC) allows employers to receive a payroll tax credit for money they spend keeping workers on their payrolls during the COVID-19 pandemic. To qualify, businesses and/or nonprofits must have been negatively affected by the pandemic by experiencing either a full or partial suspension of their business operations due to a governmental order, or a significant decline in gross receipts.
To calculate the ERC for an eligible employer, the first step is to figure out what rate of credit can be taken. The applicable rate varies depending on whether the employer has 100 or fewer employees (50% of Qualified Wages) or more than 100 employees (40% of Qualified Wages).
Once this rate has been determined, the next steps involve calculating Qualified Wages and Allowed Costs associated with providing group health benefits under Sections 3121(a) & 3306 of the Internal Revenue Code. Once all data is collected, qualified employers can calculate their potential ERC as follows:
ERC = Qualified Wages + Allowed Cost × Applicable Rate.
For example: An employer with 200 employees who paid $100,000 in Qualified Wages and incurred $10,000 in Allowed Costs would be eligible for an ERC equal to ((100,000 + 10,000) × 40%) = $44,000 ($54K if there were 100 or fewer employees). Additionally, employers should account for:
- wage limits ($10K/employee/quarter)
- credits to current and past quarters (maximum over two years)
- Social Security tax considerations
- recapture provisions when calculating their credit.
Reporting the Employee Retention Credit on a Partnership Tax Return
The Employee Retention Credit (ERC) can be a great way for businesses to save money on payroll taxes. However, partnerships need to take extra care when filing taxes to make sure that the ERC is reported correctly.
This article will explain the process for reporting the ERC on a partnership tax return and provide tips for making sure it is done correctly:
- Step 1: Determine Eligibility for the ERC.
- Step 2: Calculate the Amount of the ERC.
- Step 3: Report the ERC on the Partnership Tax Return.
- Step 4: Claim the ERC on the Partnership’s Payroll Tax Returns.
- Step 5: Claim the ERC on the Partnership’s Quarterly Tax Returns.
Partnerships that forfeited payroll tax credits under the employee retention credit (ERC) program should report forgone credits on Form 8995. This form is used to report and claim the ERC as well as for partnerships to document their forgone payroll tax credits.
Form 8995 contains two parts: Part I and Part II. Part I is used to determine if an entity qualifies for the credit, whereas Part II is used to calculate and claim the ERC. In order to take advantage of the ERC, a partnership must be eligible under Internal Revenue Code § 2301(a)(3).
Part I of Form 8995 requires partnership information such as its name, address and federal employer identification number, along with an indication of whether it met eligibility requirements when determining forfeited credits under § 2301(a)(3). Additionally, partnerships must enter total taxable wages paid in 2020 that were not refunded or credited against payroll taxes due during 2019 or 2020.
Part II of Form 8995 must be completed if a partnership is found eligible for ERC benefits in the first part. Here, partners must enter a breakdown of their respective portions of each partner’s forgone payroll tax credit amount from Line 13 on Schedule R (Form 1065). This should include an explanation of how they determined individual allowances of these amounts among their partners.
Once this form has been completed and submitted together with Form 1065, partnerships will receive a credit check equal to their total qualified forgone credit amount up to $5,000 per employee per quarter (subject to certain eligibility criteria).
Form 8995-A, Qualified Improvement Property (QIP) Classification for the Employee Retention Credit is required to be filed to take advantage of the Employee Retention Credit (ERC) for business structures classified as partnerships. This form must be included along with the partnership’s tax return, and can also be used on an amended return. The form allows for both tentative ACS amounts and general credits to be reported.
If the partnership is filing a Form 8995-A as part of their original tax return, Part I should be completed by entering all qualified wages paid plus health plan expenses paid or incurred during calendar year 2020. If a partnership is filing an amended return, they should enter in Part II any increase or decrease in their eligible 2020 wages and health plan expenses paid or incurred during the relevant 2021 period, plus any corresponding tentative credits that are available on an amended return.
On Part III the total amount of wages allowable in 2020 will need to be entered, then calculate line 3 regardless if there are any changes to these amounts on line 2a and/or 2b. Lastly, you will enter your tentative credit allowed under section 2301(a) of IRC and enter it on line 8 in Part III. After these steps have been completed you can attach this form with your partnership’s original or amended school year tax return when it’s filed at year end.
In summary, employers may be eligible for the employee retention credit if they maintain or resume their operations despite their economic difficulties due to COVID-19. Eligible employers can claim this credit on their quarterly employment tax returns or on their partnership tax returns. Partnerships should report the employee retention credit as a deduction on line 22 of Form 1065.
This credit will also decrease each partner’s distributive share of income and increase its distributive share of loss which reduces the amount each partner must pay in taxes. It is important to note that businesses must meet several eligibility requirements to qualify for this credit and that different rules apply depending on whether an employer is fully or partially suspended by governmental order due to COVID-19.
Businesses should consult with their tax professionals to ensure compliance with applicable federal and state filing requirements when reporting employee retention credits on partnership income tax returns.