Contents
Introduction
Employee retention tax credits are a government incentive intended to help employers retain their current employees without having to lay them off. These credits are designed to help employers cover a portion of the wages and salaries paid to qualifying employees.
In this article, we will discuss what this tax credit is and how it may affect businesses and their employees:
Overview of Employee Retention Tax Credit
Employee Retention Tax Credit (ERTC) is an incentive program designed to help employers who have been financially impacted by the coronavirus induced economic downturn, by providing refunds of up to $5,000 per employee in certain expenses such as wages, payroll and health insurance premiums paid between March 13th, 2020 and December 31st, 2021.
Through this program, qualifying employers are eligible to receive credits of up to 70% of qualified wages or health care costs paid by an employer. The maximum credit per employee (before factoring in any other credits allowed) is $7,000 for qualified wages or health care costs paid between March 13th, 2020 and December 31st, 2021.
To be eligible for the program, businesses must have experienced a significant reduction in revenue compared to 2019 due either decision from governmental orders closing business operations or significant decreases in customers/clients. Other criteria that must be met include being enrolled in payroll taxation (if required), being up-to-date with all tax filings and payments associated with COVID-19 relief programs and taking advantage of Loan forgivings available through Paycheck Protection Program.
In addition to ERTC’s core credits for wage spending over a specified period (erstwhile referred to as “qualified wages”), businesses can also claim a credit for their qualified health plan costs related to maintaining their group health plan from the period between March 13th through the close of 2021. Health care costs include premiums paid for medical coverage under a group health plan including further related administrative expenses like administrative fees relating to self-funding arrangements etc.
To summarize: The Employee Retention Tax Credit provides qualifying employers with up to 70% of qualified wages or health care costs depending on their eligible status. An employer receives a maximum credit of $7000 per employee before any other credits are taken into consideration like payroll taxes etc., when expenses are incurred between March 13th, 2020 and December 31st, 2021.
Eligibility Requirements
The Employee Retention Tax Credit (ERTC) is a federal tax credit designed to encourage businesses to keep their employees during the Coronavirus pandemic. To be eligible for the ERTC, your business must have experienced a decline in revenue of at least 20% during 2021. Additional requirements, such as having fewer than 500 employees and the type of wages, must also be met.
Let’s take a closer look at the eligibility requirements for the ERTC.
Qualifying wages
Under the Employee Retention Tax Credit guidelines, you may qualify for a refundable tax credit of 50% of up to $10,000 in wages per employee if you meet the following requirements:
- The employer must have been fully or partially suspended due to orders from a governmental authority related to COVID-19 during the calendar quarter.
- The employer’s gross receipts must be less than 50% of their gross receipts for the same quarter in 2019.
- Qualifying wages paid cannot exceed $10,000 total for all quarters in 2020 (or for any single quarter).
- Qualifying wages are those paid to an employee between March 13, 2020 and December 31, 2020 that do not include sick pay provided through employment taxes.
Qualifying employers
Qualifying employers are eligible to apply for the Employee Retention Tax Credit (ERTC). To be considered a qualifying employer, the employer must have been in operation during the 2020 calendar year, and meet one of the following criteria:
- Experienced either a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19;
- OR has suffered a significant decline in gross receipts. A significant decline in gross receipts is as follows:
- For businesses that existed before 1/1/2020: A decline in gross receipts when compared with the same calendar quarter from 2019 of 50% or more.
- For businesses that began after 1/1/2020: no comparison to prior quarters available. In these cases, for any quarter for which only 2019 information is available, the taxpayer’s yearly average will be determined using an average monthly revenue figure between January and December 2020.
The primary purpose of this program is to help employers cover payroll costs while their company remains open but operating at reduced capacity or closed due to the current economic climate. Eligible employers may claim this credit against up to 50% of eligible wages paid per employee during each calendar quarter ranging from March 13th through December 31st, 2020.
Qualifying employees
The Employee Retention Tax Credit is available to businesses of either any size (including self-employed individuals) that operate at any time during 2020 and experienced either certain financial hardship related to Covid-19, or had their operations suspended due to orders from a governmental authority.
Qualifying employees for the purpose of this credit include all full-time, part-time and seasonal employees. This includes those paid by W2 wages as well as self-employed individuals who have income in the form of net earnings from self-employment. Generally, young adults under age 21 will not qualify for the credit if they have worked fewer than 90 days in a given year. The majority of those working in educational or religious institutions are also excluded.
It’s important to remember that retention wages paid any employee who is not otherwise a qualifying employee won’t qualify for the tax credit. Employers should understand fully these eligibility requirements before taking advantage of this opportunity, so they know exactly how many employees can receive payment for qualifying services performed between March 13th, 2020 and December 31st, 2020 and be eligible for the tax credit.
Benefits of Employee Retention Tax Credit
Employee Retention Tax Credit (ERTC) is a very beneficial government program for businesses. This program provides businesses with the opportunity to receive tax credits for retaining their employees during the COVID-19 pandemic. By taking advantage of this program, businesses can get valuable tax savings.
It is important to understand the different ERTC eligibility requirements and the associated benefits in order to make the most of this program:
- Eligibility requirements
- Associated benefits
Tax savings
When implemented correctly, employee retention tax credit programs can result in significant tax savings. These savings can range from hundreds to thousands of dollars. Employers who participate in a qualified employee retention program are eligible to receive a tax credit of up to 40% of the wages paid to employees during the period between March 13, 2020 and January 1, 2021, up to $10,000 per employee (before taxes) per quarter or $5,000 per employee annually ($7,000 for eligible employers with taxes withheld). The tax credit is based on qualified wages paid by employers who maintain adequate staff and operations during economic hardship due to COVID-19.
Other benefits include improved morale and increased job satisfaction for employees. When workers understand that their employer values their contributions by offering an incentive such as an end-of-year bonus or recognition of longevity with their company through a special incentive program, they feel truly appreciated. As a result, this can reduce absenteeism and turnover rates in organizations. Additionally, employers who provide tangible incentives for workers help foster loyalty among employees which helps create a strong team atmosphere which leads to better customer service and success down the line.
Increased cash flow
The Employee Retention Tax Credit (ERTC) provides businesses affected by the COVID-19 crisis with access to targeted cash flow relief. The ERTC is a refundable tax credit against certain employment taxes equal to 50% of up to $10,000 in qualified wages paid by an eligible employer whose business has been financially impacted by the COVID-19 crisis. When wages are combined with employer-sponsored health care benefits, up to $10,000 in total qualified wages and health care benefits are eligible for potential credits.
The result of an approved claim is increased cash flow that many businesses can then use toward ongoing or expanded operations and other critical expenses like rent, payroll and utilities. The ERTC can also be applied to offset job creators’ Social Security tax liability on a quarterly basis so that employers get credit for the full amount immediately, allowing them the financial flexibility needed to remain operational during times of economic strain.
Improved employee morale
Employee Retention Tax Credit can have many positive impacts on a business. One of the main benefits is improved morale among employees. Employees who feel secure in their positions and appreciated for the work that they do often exhibit higher levels of commitment to their jobs and are more likely to go above and beyond for their employers. By investing in an Employee Retention Tax Credit, businesses can show their employees that they are valued and important members of the company’s team as well as improve employee satisfaction across the board.
Further, offering an Employee Retention Tax Credit helps businesses retain valued employees by providing additional reimbursement or tax credits on wages paid after certain date thresholds are met. This makes it easier for companies to keep existing staff who may be considering leaving or looking at other opportunities elsewhere, which could reduce recruitment costs in the long run and help increase employee loyalty by demonstrating that the business cares about its talent retention efforts.
Finally, issuing this type of tax credit will provide a financial incentive to support employee morale while also assisting in keeping current staff members productive and efficient in executing key tasks necessary for growth and success within a company.
How to Claim the Credit
The Employee Retention Tax Credit (ERTC) is a tax credit available to small and large businesses that are retaining their employees throughout the COVID-19 crisis. This tax credit can be claimed by businesses as a refundable credit against their employment taxes. The credit is also applicable to employers that have experienced a significant decline in gross receipts.
Let’s go over how to claim the credit:
File Form 941
To claim the credit on employment taxes paid, employers must file Forms 941 and 941-X, Employer’s Quarterly Federal Tax Return, with the IRS. Employees must remain on payroll until at least December 31 and have their wages credited to their wages as reported on Form 941.
If an employer has already filed Form 941 for the fourth quarter of 2020, they must file an amended return (Form 941-X) to be able to claim the Employee Retention Credit. On line 15a of Form 941-X, employers should enter “ERC” as the adjustment type code when claiming the credit. Employers should include information about why they are filing an amended return for that quarter due to the Employee Retention Credit in Part 3 of Form 941-X.
Since there are different eligibility criteria for when employers can claim this credit, it is important that employers ensure they are taking all available steps to ensure their employees are eligible and fulfilling all requirements for claiming this tax credit. Employers should make sure that they follow all instructions provided by the IRS accurately and completely when navigating the process of applying for the Employee Retention Credit in order to properly receive any benefits due from this program:
- Ensure employees are eligible.
- Fulfill all requirements for claiming the credit.
- Follow all instructions provided by the IRS accurately and completely.
File Form 7200
In order to claim the employee retention tax credit, you must file IRS Form 7200. This form is used to report your total qualified wages and eligible health plan expenses and will determine the amount of your tax credit. To qualify, employers must have an ongoing trade or business that was partially suspended by a governmental order related to COVID-19 during 2020 or had a significant decline in gross receipts compared to the same quarter in 2019.
On Form 7200, employers are required to provide their general information including; employer name, address, business activity code/type, EIN (Employer identification number), and contact information. Additionally, employers must provide information about their employees such as; total number of employees who have been employed for any part of the calendar quarter for which you are claiming the employee retention credit and upon whom benefits were paid; and employee type (full-time or part-time).
The form also requires information on any COVID-19 related expenses including:
- Qualified wages
- Qualified leave wages
- Health plan expenses
- Discounts received after December 31st 2020 from pizza deliveries from establishments in low-income communities
- Deferred payment of payroll taxes
All of these must be listed separately on Form 7200 for each applicable calendar quarter for which you are claiming an Employee Retention Credit.
Form 7200 then has instructions on how to claim certain credits including:
- Determining your maximum credit amount per quarter per employee type (part time/full time)
- Considering offsets due to advance payments of other refunds previously claimed under Section 4003(f) (including advance payments made under the Paycheck Protection Program during 2020)
- Determining how much qualified wage can be claimed when predicting carryforward amounts
- Instructions on reconciling actual amounts already claimed with estimated amounts due when filing this form.
File Form 940
Once you have determined your eligibility for the Employee Retention Credit and calculated the amount of credit you may receive, it is important to understand how to claim the credit. All employers that qualify for the credit must submit Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to claim the Employee Retention Credit.
You can prepare and e-file Form 940 with IRS-approved tax preparation software or contact a tax preparer who can do it for you. If you are filing your own Form 940 on paper, first double-check all of your information before submitting it to ensure accuracy. You should also make sure that you keep a copy of the form for your records in case there are any issues with processing your return.
Once the form is completed and mailed to the IRS, an official notification will be sent back confirming if their claim of the credit is accepted or denied. If approved, employers will generally receive their refunds within 10 days after filing. It’s also important to note that employers have 2 years from when taxes became due or paid to file claims for refunded amounts related to this tax credit program.
Conclusion
After examining the possible benefits of the Employee Retention Tax Credit, it is evident that this could potentially be a valuable benefit for employers and employees alike. The Employee Retention Credit is intended to help employers retain and bring back employees to their respective jobs after being financially impacted by the Coronavirus pandemic.
In conclusion, the Employee Retention Tax Credit can be seen as a potential financial relief for businesses, employees, and other stakeholders.
Summary of Employee Retention Tax Credit
Employee Retention Tax Credit is a real credit available to eligible employers and is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Employee Retention Tax Credit incentivizes employers to retain employees and avoid layoffs during the pandemic by providing up to $5,000 of federal tax credits for each employee retained. It was fully retroactive to eligibility in March 2020 and through December 2021.
In order to qualify for the Employee Retention Tax Credit, employers must be either wholly or partially closed due to governmental restrictions or have experienced a significant decline in gross receipts. Eligible employers who retained employees are eligible for an amount equal to 70% of wages paid up to a $10,000 maximum annual credit per employee. Employers with more than 100 full-time equivalent employees may claim qualified wages paid from March 13th, 2020 through December 31st, 2021 for all employees making less than $10k/month gross pay or at least as much as what other related businesses are paying on average plus 10%.
The Employee Retention Tax Credit was put in place swiftly has since provided thousands of jobs worldwide and provided significant financial aid against the economic damage generated by the COVID-19 pandemic.