Employee Retention Credit (ERC) is a business tax credit created to support employers affected by the COVID-19 pandemic. Employers with fewer than 500 employees can claim up to $5,000 in ERC credits for each employee retained by their business during the financial year.
When considering how to treat Employee Retention Credit on a Tax Return, there are some key steps to take:
- Determine if your business qualifies;
- Identify and track eligible wages;
- Maintain accurate and complete records;
- Report qualified wages on your quarterly and year-end tax return.
This guide will walk you through these steps with detailed instructions for how to treat Employee Retention Credit on your 2020 or 2021 Tax Returns so that you receive all of the credits available to you.
Qualifying for the Employee Retention Credit
The Employee Retention Credit (ERC) is a tax credit available to certain businesses that are adversely affected by the COVID-19 pandemic. This tax credit can reduce the amount of taxes your business owes to the IRS and can be claimed on quarterly payroll tax filing.
To qualify for the ERC, you will need to make sure your business meets certain criteria outlined by the IRS. Let’s get into the details:
The Employee Retention Credit (ERC) is a refundable tax credit designed to incentivize businesses and organizations to keep employees on their payroll. To qualify for the employee retention credit, employers must satisfy specific eligibility requirements.
Qualifying employers are those that:
- have fully or partially suspended operations due to government-mandated or voluntary shutdowns due to the Covid-19 pandemic,
- expect gross receipts in a subsequent taxable year to be below 50% of the comparable prior quarter in 2019, or
- have more than a 50% decline in gross receipts between comparable quarters in 2020 and 2019.
Employers must have employed an average of fewer than 500 full-time employees on business days during 2019 to qualify as well.
In addition, the ERC is available only if wages (excluding wages paid by employers subject to closure orders) are not taken into account for the purposes of claiming a Work Opportunity Tax Credit (WOTC) under Internal Revenue Code Section 51(d)(5)(E).
With respect to amounts received under the Coronavirus Aid, Relief, and Economic Security Act (CARES), only qualified wages paid after March 12, 2020 and before Jan 1, 2021 qualify for the refundable payroll tax credits provided under Section 2301 of CARES. All other wages paid before March 12 will be considered separately for purposes of claiming additional credits.
The Employee Retention Credit (ERC) provides an incentive for businesses to continue paying employees despite disruptions due to the COVID-19 pandemic. The credit is a refundable tax credit, meaning that businesses can be refunded any amount of the credit that exceeds their 2020 payroll tax liability. To qualify for the ERC credit, employers must pay eligible wages to certain pre-pandemic employees and have experienced one of the following conditions:
In order to claim the employee retention credit, employers must have paid qualified wages between March 12, 2020, and December 31, 2020. Qualified wages are either “qualified health plan expenses” or “cash wages” paid to employees who are not providing services due to COVID-19 related business closures.
- Eligible Health Plan Expenses are payments required for employer- sponsored health coverage for 2021 and contributions made on behalf of employees for health coverage under a cafeteria plan in 2021 based on salary reduction agreements in effect during 2020.
- Cash Wages are amounts fully subject to federal income tax withholding from an employee’s paycheck during this period which include payments as vacation days, sick days, parental leave and other payment arrangements that do not qualify as healthcare expenses or salary reduction agreements through a cafeteria plan. It does not include amounts like elective deferrals or catch up contributions offered through a 401(k) plan or any equivalent contributions that reduce an employee’s paycheck before federal income tax withholding occurs.
Qualified Health Plan Expenses
Expenses for qualified health plans, including coverage for medical and hospital insurance, prescription drugs, vision care or dental care may qualify you for the employee retention credit. Qualified expenses are calculated on a Form 941 basis and must be paid or incurred by December 31, 2020. Keep in mind that IRS regulations state that “qualified wages are those wages paid to an employee who performs services during the applicable period and before January 1, 2021”. Therefore expenses must be paid before January 1 in order to qualify you for the Employee Retention Credit.
Qualifying health plan expenses will count towards your total amount of qualified wages eligible for the credit only if your employees are actually enrolled in a health plan through your business as of March 12, 2020 (the date of enactment of this law) and remain continuously enrolled with you through December 31, 2020. Keep in mind that you cannot use qualified expenses incurred after March 12th as part of qualifying wages; these will instead count towards payroll taxes. Additionally, employers cannot claim reimbursements for prior premiums already paid prior to March 12th as part of their qualifying wages under this provision; those reimbursements will count towards total quarterly payroll costs instead.
Calculating the Employee Retention Credit
Employers are eligible for the Employee Retention Credit, a refundable tax credit under the CARES act, when they keep their employees on payroll. The amount of the credit is based on the wages paid during the quarter to employees who are not providing services due to the economic impact of COVID-19.
Understanding how to properly calculate the Employee Retention Credit on a tax return is important for maximizing savings.
Maximum Credit Amount
The maximum amount of employee retention credit any employer can claim is equal to the lesser of:
- $5,000 per employee, or
- The total increase in qualified wages paid in 2020, when compared to the same period in 2019. This can be a quarter (January 1, 2020 – March 31st 2020), season (January 1, 2020 – June 30th 2020), or a calendar year (January 1- December 31st). For seasonal employers with a non-calendar year end, employers must use one of the full quarters of 2019 or any other periods not over 12 months that begin and end in 2020 to compare their wages for the same period in both years.
The Retention Credit is fully refundable for employers with fewer than 500 employees and limited for employers with more than 500 employees. Employers are entitled to receive a maximum credit equal to 50% of qualified wages up to $10,000 quarterly (($5,000 x 2)). Self-employed individuals who filed Form 1040 Schedule C can claim this credit on Form 941 under Line 16d refundable credits.
Calculating the Credit
The Employee Retention Credit is a refundable credit available to certain employers as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is designed to help employers keep employees on payroll at a time when businesses may be struggling due to the pandemic. The credit is based on a percentage of wages paid up to $5,000 for each employee. The amount of the credit can vary from employer to employer and will depend on several factors.
To calculate your Employee Retention Credit, you must first determine how many eligible employees you had during the period in question and how much total wages were paid to them during that period. The amount of credit you are entitled to claim is then determined by calculating 50% of qualified wages up to $10,000 per employee for any given quarter (January through March, April through June, July though September and October through December).
If your average number of full-time employees during the year was greater than what it was in 2019, then your qualified wages are simply all wages paid up to $10,000 per full-time employee quarterly. If your average number of full time employees during the year was lower than what it was in 2019 then qualified wages are calculated using either a base period or lookback method which allows you take into account the months preceding or after the applicable quarter for comparison purposes.
For example if an employer had 36 full time employees in 2019 but 32 full time equivalents in 2020, they could use calculation methods taking into account taxes already filed with IRS prior quarters such as Form 941 or quarterly estimated taxes payments made during 2020 (April through December). The same rules apply regardless if an employer’s income decrease was related or unrelated to COVID 19 events which may have caused layoffs or pay reductions prior filing the application form (Form 7200) requesting the employee retention credit.
Claiming the Employee Retention Credit
The Employee Retention Credit (ERC) is a tax credit that is available to businesses affected by the coronavirus pandemic. This credit can help employers offset certain wages paid to employees during the crisis.
In this article, we will discuss how to claim the employee retention credit on your tax return. We will cover qualifying wages, how to calculate and claim the credit, and any other important details.
Filing Form 941
According to the IRS, employers claiming the Employee Retention Credit must file Form 941, Employer’s Quarterly Federal Tax Return. This form is a summarized report of the employer’s total taxable wages for each quarter. It is important to note that when claiming the credit, Form 941 does not allow for a reduction of taxes owed from wage deductions and paid holidays.
To claim the credit, employers should use lines 19a-19d on Form 941, respectively titled ‘Additional Medicare Tax’ through ‘Depositing Additional Taxes’. There are instructions provided on how to enter relevant information in each line about the employee wages and credit amount for which you are applying. Employers should also include all supporting documents showing wages paid as well as proof of eligibility with their submission of Form 941.
Upon approval, employers will receive a notice informing them that they have been approved for their credits and have met all requirements in successfully filing Form 941. Once this notice has been received, an employer can then:
- Amend their quarterly filing
- Submit a claim using IRS Form 7200 to receive their refund as soon as possible if they decide to apply for it sooner than expected.
Filing Form 944
Filing Form 944 is an important step in obtaining the Employee Retention Credit. It’s a good idea to have a clear understanding of the applicable rules and regulations before submitting your application in order to avoid any unnecessary delays or costly mistakes. Here are some tips to help you understand what is required:
- Form 944 must be filed no later than the last day of the calendar year, or if filed electronically, on January 31st of the following year.
- You must complete Part 1 for the current calendar year and provide all necessary information regarding your business including its name and federal employer identification number (FEIN), as well as its address, telephone number, and other pertinent details.
- In Part 2, you’ll need to report how many employees worked for your business during each quarter of the current year, along with their compensation.
- Finally, on Part 3 submit all relevant details relating to payments made towards employee retention credits such as coverage period of credit taken, total amount claimed, etc.
By understanding these requirements and properly preparing Form 944 ahead of time will help ensure that you accurately claim your Employee Retention Credit with minimal headaches.
Claiming the Credit on Your Tax Return
The Employee Retention Credit is claimed on Form 941 (Employer’s Quarterly Federal Tax Return) and usually allows businesses to receive a credit for 50 percent of qualifying wages up to $5,000 per employee for each quarter. It is easy for employers to calculate the amount of the credit they can claim using Form 5884-A (Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Retention Credits), which is used when calculating W-2 wages that are eligible for the Credit.
Form 941 includes a line where employers can report any qualified wages paid during the quarter as well as additions or adjustments. Line 15a of Form 941 also allows businesses to report any qualifying wages they paid while claiming this credit, and this information will need to be included when filing the return. Employers will also need to include copies of all applicable payroll records evidencing compensation paid during each quarter for which the credit is claimed.
In addition, employers must complete Part III of Form 5884-A in order to determine their total credit amount for each quarter. This form requires employers to enter total wages paid during the quarter as well as any applicable adjustments that were made in order to calculate their maximum refundable credits. Under lines 5d or 6d, depending on what part of town you file your taxes in, submit your employee retention credit calculation and total amount due according to your filing status. Once you finish submitting all relevant information on Schedule M-3, you are ready to file form 941 with this employee retention tax break!
At the end of the day, it is up to you to determine how you would like to treat the employee retention credit on your tax return. It is important for businesses to review their specific situation, consult with a trusted tax advisor and make the necessary tax filings. This can help ensure that all allowable credits and deductions are being claimed appropriately.
Business owners who are confused or uncertain should reach out to a reliable accounting professional or CPA for assistance. With experienced guidance, they can confidently address any issues related to employee retention credit and ensure their tax filings are accurate and complete.