Contents
Introduction
The Employee Retention Tax Credit (or ERTC) is a tax incentive program aimed at helping businesses impacted by the COVID-19 pandemic. This Federal tax credit is designed to encourage employers to maintain or rehire workers, maintain their salaries and wages, and keep the business running. ERTC provides a refundable tax credit, up to 50% of the wages paid to each eligible employee in 2020 and 2021.
Companies can benefit from this credit, but should understand the details of the program before claiming the credit:
- Eligibility requirements
- Calculating the credit
- Claiming the credit
Definition of Employee Retention Tax Credit
Employee Retention Tax Credit (ERTC) is a tax credit intended to encourage businesses to keep employees on their payroll during economic downturns. It’s a benefit offered by the federal government to support employers struggling with decreased sales, layoffs, or furloughs due to the impact of COVID-19. The credit allows employers to gain a refundable tax credit equal to 50% of wages paid up to certain thresholds as they retain their employees between March 13, 2020 and January 1, 2021. The value of the credit varies based on when wages are paid, the size of the employer’s workforce, and whether or not the employer has received a Small Business Interruption Loan (SBAIL).
The ERTC is currently available for all qualifying employers with fewer than 500 employees in any month during 2020 or 2021. Eligible employers are those that have experienced:
- Full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings; or
- Significant decline in gross receipts during either of two consecutive quarters in 2020 compared with 2019.
Employers should seek out professional advice regarding eligibility and documentation requirements before applying for this tax credit.
Overview of the CARES Act
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is a massive stimulus package passed by Congress and signed into law in March of 2020. This bill allocates more than $2 trillion in aid to Americans, businesses, state and local governments, health care organizations, education institutions, and others affected by the global pandemic. Among the many provisions of this law is one providing an Employee Retention Tax Credit (ERTC).
The ERTC is designed to help businesses impacted by COVID-19 keep their employees on payroll without incurring high costs. The tax credit applies to wages paid to employees who would otherwise have been laid off or had their hours reduced due to business operations that have been fully or partially suspended as a result of a government order related to COVID-19. Eligible employers include companies with 500 or fewer full-time or full-time equivalent employees. Credits range from 50% to 70% of qualified wages paid up to $10,000 per employee for the taxable year.
The CARES Act also provides:
- Enhanced unemployment benefits for those who lose their job due to coronavirus related circumstances.
- Relief for student loan borrowers affected by disruptions in repayment schedules due to COVID-19.
Eligibility Requirements
The Employee Retention Tax Credit (ERTC) allows employers to eligible for up to $5,000 per employee in tax credits for retaining employees, or for continuing to pay them wages. In order to be eligible for the ERTC, employers must meet certain criteria.
This section will look at the criteria that an employer must meet in order to be eligible for this tax credit:
Qualifying wages
The Employee Retention Credit (ERC) is available to U.S. employers who are experiencing business disruption as a result of the coronavirus pandemic, for wages paid from March 13th, 2020 through December 31st, 2021. Employers may claim a refundable tax credit of up to $7,000 per employee for 50% of qualified wages paid up to $10,000 per calendar quarter in 2020.
Qualifying wages in 2020 must be paid to employees who worked in that quarter and either:
- The employer had operations suspended due to an order from an appropriate governmental authority; or
- The employer experienced a significant decline in gross receipts during the calendar quarter of at least 50 percent compared with gross receipts for the same calendar quarter in 2019.
In 2021 the tax credit is based on 70 percent of qualified wages up to $10,000 total per employee and only applies if employer has experienced an average quarterly gross receipts decline of 20% or more compared with the same 2019 period. The 2021 qualifying wages also must be paid to any employee who works or receives vacation pay under an established policy or agreement regardless if their normal work required has been impacted by COVID-19 restrictions.
Qualifying employers
To quality for the Employee Retention Tax Credit, employers must meet certain eligibility requirements.
- First, employers must show that they have been fully or partially suspended due to 2020 Coronavirus-related orders from the government. This includes orders related to operations, transportation, services and supply chain. Additionally, the employer must be able to demonstrate that in order to comply with these orders, it has experienced a significant decline in gross receipts when compared to the same calendar quarter in 2019. A significant decline is defined as a decrease of 50% or more compared to gross receipts during the same quarter of 2019.
- Qualifying employers must also meet payroll requirements. These include having an average of fewer than 500 full and part-time employees on payroll during 2019 as well as making qualified wages between March 12th and December 31st of 2020 for any employee who works over 40 hours per week or more than 120 hours total per month even if layoff occurred prior to March 12th.
- Finally, qualifying employers must pay qualified wages directly from their books and records – those amounts cannot be deferrals under the CARES Act or any other act related to COVID-19 relief measures.
Qualifying employees
Eligible employers are those that operated a trade or business during 2020 and, for a calendar quarter in 2020, either fully or partially suspended operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings because of COVID-19; or experienced a significant decline in gross receipts.
To be eligible for the Employee Retention Tax Credit (ERTC), employers must also have had an average number of full-time employees in 2020 that is less than the sum of:
- the average number of full-time employees in 2019; and
- the average number of full-time equivalent employees in 2019.
Qualifying employees include certain individuals necessary to an employer’s operations who:
- Performed services before January 1, 2021; and
- Are not collectively bargained.
To be eligible under this category, the employee must have been employed by the employer for at least 90 days during 2020 and must meet income eligibility requirements during that time frame. In addition, no other person may claim a Work Opportunity Tax Credit with respect to such employee.
Benefits of Employee Retention Tax Credit
The Employee Retention Tax Credit is a tax credit provided by the federal government to eligible employers to help them keep their employees on payroll during the COVID-19 pandemic. This tax credit can give employers up to $5,000 per employee for wages paid from March 13, 2020 to December 31, 2020.
There are a few key benefits of taking advantage of this tax credit. Let’s explore them in more detail:
Potential savings on taxes
The Employee Retention Tax Credit (ERTC) is a refundable tax credit based on employee withholding taxes that can be used to offset payroll costs and other related expenses for employers affected by the COVID-19 pandemic. By taking advantage of this incentive, employers can reduce their payroll tax costs and improve their financial standing during tough times.
If you are an eligible employer, you could qualify for an ERTC equal to 50% of the qualified wages paid to employees during the period beginning March 13, 2020 and ending December 31, 2020. This credit is capped at $5,000 per employee and $10,000 total per qualified employee in any taxable year if wages paid are below $10,000. The total amount of ERTC allowed per employer is limited to $5 million in each taxable year based on gross quarterly wages.
In addition to reducing your payroll tax liability due to the wage cost associated with applicable employees such as health insurance premiums, state unemployment insurance taxes and other related expenses, eligible employers should also consider their potential savings from income taxes due to the deductions taken against gross income from wages not included in qualifying wages for purposes of calculating the ERTC. An example would be a payment of group term life insurance premiums for certain qualifying employees which do not count as qualified wages towards an ERTC but give employers a deduction from gross income before calculating income taxes due for that year. Furthermore potential savings may include state income tax savings or credits related to providing contributions towards certain qualified high deductible health plans available in some states where applicable employees share with employer a portion of premium costs helping them reduce their taxable individual incomes while simultaneously receiving better health coverage than traditional coverage usually provided with lower or no premium cost assuming use of high deductible plans otherwise available apart from ERTC-qualified plans without additional employer contributions.
Ability to retain employees
The Employee Retention Tax Credit (ERTC) is a federal tax incentive designed to help businesses adversely affected by the COVID-19 pandemic to retain their employees. The credit is available to employers who are either fully or partially suspended as a result of government orders related to COVID-19, or whose gross receipts decline by more than 20% over any 2020 quarter when compared to the same 2019 quarter. Employers may claim this refundable tax credit for each calendar quarter from 2020 through June 2021. The amount of the credit depends on several factors, including the number of employees on payroll and wages paid during the time period.
The ERTC allows employers who qualify for it to better retain their existing workforce, thereby alleviating fears of layoffs or reduced pay due to business disruption caused by the pandemic. This provides added financial security for employees and greatly reduces stress levels in uncertain times. Furthermore, since applying for and claiming the ERTC does not require businesses to have an actual layoff event, it helps reduce overhead costs associated with HR needs such as severance payments and job searching activities. Additionally, allowing employees who were laid off due to COVID-19 related disruptions, but would still like to stay with the business, may qualify them for additional tax credits like Work Opportunity Tax Credits (WOTC) when they are rehired before December 2021.
How to Claim the Credit
The Employee Retention Tax Credit (ERTC) is a federal tax credit that can help businesses offset the costs of retaining and hiring employees. To qualify for the ERTC, a business must have experienced a full or partial suspension of its operations due to governmental orders or experienced a significant gross receipts decline.
With the ERTC, eligible employers can receive a credit for 50% of qualified wages paid to employees, up to a maximum of $5,000 per employee. In this section, we will discuss the steps necessary to claim the credit:
Filing Form 941
In order to properly claim the Employee Retention Tax Credit for your business, you must file Form 941. Form 941 is the Employer’s Quarterly Federal Tax Return which is used to report federal income taxes withheld from employees’ wages during the quarter, as well as an employer’s share of FICA and Medicare taxes. This form will serve as proof of your employee count, which is necessary in order to claim this tax credit.
Form 941 must be filed online or by mail at least quarterly on or before its due date. Keep in mind that filing even a day late may cause you to incur penalties and other fees. Additionally, all businesses must file Form 941 (even those with zero payroll taxes) in order to claim their Employee Retention Tax Credit. This form can be found on the IRS website or purchased from a local IRS office if needed.
Filing Form 7200
In order to claim the Employee Retention Tax Credit, employers must file an IRS Form 7200. This form provides employers with the opportunity to claim the credit and provide supporting documentation. Employers are required to report information such as their eligible wages paid and other related taxable income, complete calculations on payroll taxes which are associated with qualifying wages, any credit already taken and amount of qualified wages being claimed for a qualified employer.
When submitting the form, eligible employers will be requesting an advance of a portion of their credits on Line 8. Eligible employers who have received Paycheck Protection Program (PPP) loans may also be able to take advantage of both PPP funds and employee retention credits in certain circumstances. Employers must carefully review guidance from IRS before seeking these combined incentives.
Finally, in order to take advantage of this tax credit employers need to determine whether or not they qualify according to eligibility requirements set forth by the IRS. To qualify for this tax credit an employer must demonstrate that their operations have been:
- Fully or partially suspended due to orders from governmental authorities limiting commerce, travel or group meetings due to the COVID-19 pandemic;
- Experienced a significant decline in gross receipts during either 2020 quarter compared with two prior quarters;or before quarters in 2020 compared with 2019.
Filing Form 944
Filing Form 944 is the primary method for employers to claim the employee retention credit on eligible wages paid from March 13, 2020 through December 31, 2020. Employers must attach a copy of Form 944 when filing their return and use the Section 6031(a) amount on Schedule R (Form 941 or 941-SS).
To be eligible for the credit, employers are required to submit copies of all quarterly payroll returns for 2021 Q1. When filing Form 944, employers must provide amounts for total wages paid in each quarter and an indication of which wages were payroll costs that qualify for the credit.
Employers can take advantage of filing extensions designated by IRS regulations on both filing assessments and payment deadlines. For most employers, this means they have up until September 30th 2023 to file Form 944. It is strongly recommended that you contact your local tax professional or IRS representative if you have any further questions regarding filing procedures and applicable extensions of due dates.
Conclusion
In conclusion, the Employee Retention Tax Credit can be a great way for businesses to save money on payroll taxes and to retain employees especially during difficult times. This credit can help a business to encourage their employees to stay for the long-term and can also help to fill any financial gaps that may have occurred due to the pandemic.
Summary of Employee Retention Tax Credit
Employee Retention Tax Credit (ERTC) is an incentive created by the federal government to help businesses affected by the Coronavirus pandemic. It allows eligible employers to claim a credit of up to 50% of qualified wages that they pay their employees between March 13, 2020 and January 1, 2021.
To be eligible for ERTC, a business must have either seen their gross receipts declined by more than 20% in any given quarter compared to the same quarter in 2019, or meet a similar criteria for self-employed individuals or nonprofit organizations. The exact amount of ERTC varies based on how much adjusted gross income the employer makes and how many full-time employees they employ.
The benefit of applying for ERTC is that it helps businesses cover employee wages when business has slowed or stopped during this pandemic. With an Employee Retention Tax Credit, employers can use the tax savings to support their payroll expenses while they recover from this crisis and begin rebuilding their operations. By taking advantage of the program, businesses can financially support their staff during these trying times while also reducing their overall tax liability moving forward.
Benefits of the credit
Employers may benefit significantly from the Employee Retention Tax Credit (ERC). This tax credit offers a significant reduction in payroll taxes by allowing employers to offset up to $5,000 of payroll expenses per employee. By utilizing the ERC, employers can reduce their tax liabilities by up to 50% of their total payroll costs in 2020 and 2021.
Most noteworthy amongst the benefits of the credit is that it can be applied retroactively for 2020 once received, meaning an employer who has already paid out payroll expenses in 2020 could still receive full or partial reimbursement for those expenses through the ERC. Additionally, businesses need not have experienced any losses due to COVID-19 to claim this credit for wages paid between March 12th and December 31st, 2020. Eligibility criteria must still be met including employee count thresholds and wage caps per quarter, but employers may claim this credit regardless of whether they saw a decrease in revenue due to pandemic related losses.
By taking advantage of the Employee Retention Tax Credit program, employers may significantly reduce their total cost of labor and free up available funds for more strategic operations including:
- Growing their business
- Hiring new talent.