Contents
Introduction
If your business is unable to operate due to the pandemic caused by Coronavirus (COVID-19), you may qualify for a refundable payroll tax credit called the Employee Retention Credit (ERC). To get the credit, you must fill out and file the IRS form 1120S, U.S. Income Tax Return for an S Corporation.
This article provides step-by-step instructions on how to complete Form 1120S and report your company’s employee retention credit on your tax return.
It’s important to note that this article does not cover all filing options or all applicable rules and regulations related to the ERC program. Contact a qualified tax professional if you have questions about qualifications or need help filing your return.
What is the Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit available to employers who kept their employees on payroll during the COVID-19 pandemic. This credit helps businesses retain and pay wages to their employees. It covers up to 80% of wages, up to a maximum credit of $5,000 per employee.
Let’s take a deeper look into how this credit works and how to report it on your 1120s tax return:
Eligibility Requirements
The Employee Retention Credit (ERC) is a refundable tax credit available to U.S. employers in response to the economic disruptions caused by the COVID-19 pandemic. Specifically, the credit allows employers to offset payroll taxes incurred by providing eligible wages and health plan expenditures to employees, while also providing employers with an incentive to retain those employees and avoid layoffs.
In order to be eligible for the ERC, employers must first meet certain criteria as outlined below:
- Businesses must have experienced full or partial operations suspension due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19; OR they suffered at least a 50 percent reduction in gross receipts during five months of 2020 when compared with the same calendar quarter in 2019.
- Businesses may not receive federal assistance for wages paid under the Paycheck Protection Program (PPP).
- Employers must have been in business prior to March 13, 2020 with any of their trade or business operations based in the U.S. For purposes of this credit, businesses are considered as having been formed on March 13 if organized under applicable state law before that date but not yet licensed under such law or otherwise doing business prior to that date provided that such organizations received their license or began doing business within 12 months after March 13th.
- Employers must pay wages after March 12 and before January 1, 2021 in order be eligible for the ERC; however, employers can claim credits only on wages paid on or after December 31, 2019 but before January 1 2021.
Qualified Wages
The Employee Retention Credit (ERC) is a provision of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). This program gives employers impacted by the economic downturn caused by the COVID-19 pandemic an additional tax benefit to encourage them to keep employees on their payroll. Qualifying employers are eligible for an refundable credit of up to 50% of qualified wages paid from March 13, 2020 through December 31, 2020.
Qualified wages are wages paid to employees after March 12, 2020 and before January 1, 2021. Eligible employers can claim a credit for up to $5,000 for each employee for wages paid after December 31, 2020 as long as they meet other requirements.
To calculate qualified wages, employers must first calculate the average number of full-time equivalent employees in 2019. From there, they can deduct two different types of qualifying wages; the first being qualified health plan expenses and the second being cash wage payments to employees. Health plan expense wages are limited up to an amount equal with what it would cost if all full-time equivalent employees were given coverage under a group health plan. As for cash wage payments covered by this ERC provision include cash wages that you actually pay or withhold from an employee’s paycheck in accordance with income tax withholding your state or federal labor laws specify during any pay period occurring within the applicable period covered in 2021-2020 calendar year quarters – March 13 – June 30th (see chart below).
Cash wage credits can be applied up to $10k per employee over all periods—any quarter you do not earn the full $5k credit in that quarter may be carried over into future quarters but no further than December 31st 2021 when you get your last credit advance payment installment allowed. It is important that you track these quarterly calculations accurately as any discrepancies found later on could result in penalties associated with incorrect filings and reporting with IRS!
How to Report Employee Retention Credit on Tax Return 1120s
Doing your taxes can be complicated and intimidating but with the help of Employee Retention Credits, tax filing has gotten a bit easier. These tax credits can help lessen the financial burden of your business during these trying times.
In this post, we will walk you through how to report the Employee Retention Credit on your Tax Return 1120s.
Credit Calculation
The Employee Retention Credit (ERC) is a refundable payroll tax credit for employers that is available for 2020 and 2021. It offsets up to 100% of the employer’s portion of Social Security tax paid on wages between March 13, 2020, and December 31, 2021. The amount of the credit is based on a two-pronged calculation involving eligible wages paid to an employee or former employee in 2020 or 2021 and the average number of employees employed in 2019 or 2020.
Eligible employers can claim the ERC on their quarterly Form 941 filings, as well as through an approved adjustment process on any amended return. The credit also can be claimed against employer FICA obligations (up to certain limits) through Form 944 Annual Federal Tax Return for Small Employers Withholding Processed by IRS Electronic Funds Transfer Program.
To claim the ERC on your annual tax return 1120s filing, use line 6c of form 8994; enter total eligible wages paid from Line 10a of Form 8994, multiplied by 84.5%. The resulting amount will then be entered onto Line 12b of your 1120S form along with other credits you received for your business taxes during the year being reported. Finally, you must enter any remaining balance from Line 10b of Form 8994 onto Line 12a as a payable amount due from you.
Filing Process
In order to effectively report Employee Retention Credit (ERC) on Form 1120S, taxpayers will need to become familiar with the parts of the form as well as with IRS regulations. To begin, Taxpayers should answer the questions on page 1 of Form 1120S which will direct them to related sections within the document. For example, if taxpayers answer “Yes” to the first question asking if they are eligible for the ERC, it will direct them to a dedicated section for filing out information required for claiming the credit.
When entering information about their ERC into Form 1120S in this dedicated section, Taxpayers should note that:
- Certain details must be provided including a description of wages and related expenses that qualify for relief via programs under Section 139 of the Internal Revenue Code.
- A worksheet should be completed to arrive at an accurate amount of credit available and this is captured in Part IV on Lines 27 – 29.
- Any excess credit amount can be carried forwards up to five years; this should also be observed within this section.
- The aggregate amount of retention credits claimed—including any credit claimed by other members of a controlled group—must also be reported here on lines 29a-29d.
After completing these steps, taxpayers can submit their return following instructions found at end of Form 1120S itself or instructions given by local tax professional.
Conclusion
Conclusion:
Employers who have opted to take advantage of the Employee Retention Credit (ERC) under the CARES Act in 2020 should keep diligent records of their filing activity. Companies must report their ERC to their bookkeepers and other tax professionals, and must make sure to include information about their credit claims when filing Form 1120s. Tax preparers must ensure they accurately complete the 1120s Schedule J to avoid penalties or audit risks. Additionally, employers should note that they may still be eligible for additional credits depending on certain criteria. Consulting a knowledgeable professional is recommended if any questions arise regarding the filing requirements of the Employee Retention Credit (ERC).