Introduction to Employee Retention Tax Credit
The Employee Retention Tax Credit, or ERTC, is a credit available to certain employers who have experienced financial hardships during the calendar year 2021 due to the COVID-19 pandemic. The ERTC was developed to help employers keep their employees even when business slowed due to the pandemic. This credit is available to employers of all sizes and can help them retain or rehire their employees.
In this section, we will discuss the eligibility requirements, how to apply for the credit and how the credit can be used:
- Eligibility requirements
- How to apply for the credit
- How the credit can be used
Overview of ERTC
The Employee Retention Tax Credit (ERTC) is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It was created to help businesses continue to pay their employees during the COVID-19 pandemic and economic crisis. The ERTC provides eligible employers with a tax credit for up to half of the qualified wages they pay from March 13, 2020, through December 31, 2021.
Eligible employers include those that have seen a decline in gross receipts as well as those that have chosen to suspend or reduce operations due to government-mandated restrictions related to COVID-19. Eligible employers must also meet certain criteria in terms of the number of workers employed and amounts paid in wages.
Employers will be able to claim the ERTC when filing their quarterly or annual employment tax returns (Form 941). The credit is available on both a quarterly basis and an annual basis, with credits claimed on either form being refundable on an accelerated schedule. The credit can be claimed retroactively for wages paid after March 13th up through December 31st 2021, however any unused credits may be carried back or forward into future quarters or years depending on the business’s tax year end. Possible limitations may also apply based upon advanced use of credits from other prior quarters or years; consult a qualified professional for details about how this might affect your specific situation.
The ERTC may be available for both for-profit businesses and non-profit organizations alike; however there are important differences among these entities regarding how the credit works and how it should be reported on various forms used by each type of entity. To determine eligibility and maximize benefit from this program it is recommended to seek out advice from qualified professionals including CPAs/tax accountants, payroll advisors, legal counsels etc..
The Employee Retention Tax Credit (ERTC) was created to encourage businesses to keep their employees on their payrolls during the COVID-19 pandemic. To be eligible for the ERTC, an employer must meet the following requirements:
- The employer must have experienced either a full or partial suspension of operations due to a governmental order related to COVID-19, or a significant decline in gross receipts. The size of this decline and/or the length of time it lasts will determine an employer’s eligibility for the credit.
- With certain exceptions, business groups must not have more than 500 employees in order to qualify for ERTC benefits. This limitation applies both at the individual location level yet also across all entities included in a group filing, such as those with similar or identical ownerships or common reporting relationships.
- Businesses that have received Paycheck Protection Program (PPP) loans may also be eligible for this credit, as long as they can demonstrate that they used their PPP loan funds toward expenses not eligible for reimbursement under the PPP loan program (such as payroll costs).
It is important to note that one business may not use both PPP funds and ERTC benefits; employers must select one program or another when seeking relief from financial hardship due to the pandemic. It is also important for business owners and operators to review all 2021 changes implemented by recent legislation passed into law; these changes may affect eligibility requirements and other key details regarding taxpayer credits such as ERTC.
Benefits of ERTC
The Employee Retention Tax Credit (ERTC) is a new tax credit that was introduced in 2021. It is designed to help employers that have been affected by the COVID-19 pandemic. This credit provides eligible employers with a refundable payroll tax credit of up to $5,000 per employee.
Let’s look at some of the benefits of the ERTC:
Employers who adopt an ERTC program can receive a maximum of two credits, each containing different terms and conditions. The most beneficial component of an ERTC involves the Employee Retention Credit (ERC) which is designed to provide relief to employers who were impacted by the COVID-19 pandemic.
The ERC is a refundable tax credit available to employers whose operations were either fully or partially suspended due to orders from a governmental authority due to COVID-19, or whose gross receipts declined by more than 20% when compared with the same quarter in 2019. Eligible employers will receive up to $5,000 for each employee that remains on their payroll for at least 90 days during the 2020 calendar year. An additional Federal Insurance Contributions Act (FICA) tax credit is available for qualified wages paid from March 13, 2020 through December 31, 2020 up to $10K per employee, per quarter.
In addition to employer tax credits, employees may also be eligibly for reduced Social Security taxes if certain conditions are met. Employees that have their hours reduced due to qualifying events are eligible for reductions in FICA taxes up to $2,400, or the equivalent of 6.2% of wages received up until December 31st of this year. Employees should still meet all applicable requirements such as filing status and income level during 2019 in order qualify and should check with their employer before applying any Social Security benefits they may qualifyfor through ERTC programs.
How to Claim the Credit
The Employee Retention Credit (ERTC) is a refundable tax credit provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The objective of the ERTC is to incentivize employers to keep their employees on payroll by providing them with up to $5,000 per employee per quarter in payroll tax credits.
The ERTC can be claimed on Form 941 – Employer’s Quarterly Federal Tax Return or prior-quarter Forms 941-X – Adjusted Employer’s Quarterly Federal Tax Return. After filing an eligible quarter’s Form(s), you may claim the credit by submitting Form 7200 – Advance Payment of Employer Credits Due To COVID-19 on a quarterly basis if needed.
The ERTC consists of two parts:
- Qualifying Wages paid between March 13, 2020 and December 31, 2020; and
- Qualifying Health Plan Expenses paid during such period.
To be eligible for the credit, employers must have had either full or partial suspension of their business operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19; or had a significant decline in gross receipts year over year (i.e., at least 50 percent).
In order to maximize the value of this credit, employers should consult their tax advisors as soon as possible so they can understand the requirements needed to qualify and claim the ERTC with accuracy.
How to Calculate ERTC
The Employee Retention Tax Credit (ERTC) can provide businesses with an incentive to retain employees as the country continues to cope with the economic impact of the Coronavirus pandemic. This tax credit is designed to reward employers who keep employees on their payrolls and discourage them from laying off staff.
Calculating the ERTC requires a few steps so that you can receive the maximum benefit. Let’s discuss how to calculate the ERTC:
The Employee Retention Tax Credit (ERTC) was created in response to the economic impact of the coronavirus pandemic. This credit is designed to encourage employers to reduce layoffs and retain employees by providing a tax credit for qualified wages paid from March 12, 2020, through July 31, 2021. Eligible employers may claim the ERTC for wages up to $10,000 per employee or contract worker.
To qualify for ERTC, certain criteria must be met. First, employers must have a full or partial suspension of trade or business due to orders from their jurisdiction related to COVID-19 or experience a decline in gross receipts of at least 50% when compared with the same quarter prior year. Second, wages must consist of qualified wages paid per employee and not exceed $10,000 over a two consecutive quarter period beginning after March 12th 2020 and ending before July 1st 2021. Lastly employers must be current with all required employment taxes on time throughout the qualifying period and not receive a Small Business Interruption Loan under the Paycheck Protection Program during that same timeframe.
Qualified wages are those provided by an eligible employer whose workers have experienced reduced work hours due to significant decline in operating profits as compared year-over-year in any calendar quarter during either 2019 or 2020 that were temporarily restored due to unavoidable reductions in business operations due pre-existing contractual obligations. Qualified wages also include compensation paid per employee related to furloughed workers – those that retained hope of being recalled but were not actively engaged in employment services during such period – so long as reasonable notice is given prior to commencing back pay for returned employees within one month following issuance of any applicable orders from governmental authorities remitting such restrictions as applied before March 12th 2020. Qualified wages do not include sick leave payments provided under Families First Coronavirus Response Act (FFCRA), tips received by an employee directly from customers on behalf of an employer (equivalent federal tax deposit requirements instead apply), nor bonuses granted solely at employer discretion. Eligible employers should consult their internal accounting expert for thorough examination of total qualified wage expenses incurred for understanding proper application thresholds associated with ERTC provisions before submission into prepared returns where available deductions shall be determined accordingly.
Qualified Health Plan Expenses
In 2021, employers are eligible to claim the Employee Retention Tax Credit (ERTC) for certain expenses associated with qualified health plans. The ERTC allows eligible employers to claim a refundable credit in an amount equal to 50% of certain “Qualified Health Plan Expenses” they incur after December 31, 2020, and before December 31, 2021.
In order to calculate this credit, employers should first understand what qualifies as a “Qualified Health Plan Expense” and the rules around calculating ERTC eligibility.
Under the ERTC program, Qualified Health Plan Expenses include premiums for health coverage provided through an employer-sponsored group health plan for employees. The expenses must relate to health coverage available through an underlying plan that is fully insured by a licensed health insurance provider or self-funded by the employer for which all applicable premium taxes are paid or incurred by an employer during any applicable period in 2021. The rules governing Qualified Health Plan Expenses also require that employees would not be considered eligible if they were offered and declined medical coverage either voluntarily or upon termination of employment after January 1, 2020.
The Employee Retention Tax Credit will be equal to 50% of all Qualified Health Plan Expenses incurred after December 31, 2020 and before December 31st 2021 up to a maximum of $7000 per employee annually. Employers can then use this credit against their federal income tax liability for their ordinary taxable income for the taxable year in which those expenses were paid or incurred. Note that employers claiming the tax credit may not also deduct expenses related to qualified health plans from their taxable income.
Calculating the Credit
The Employee Retention Tax Credit (ERTC) is a refundable tax credit that allows employers to claim a tax credit for eligible wages paid between January 1, 2020 and June 30, 2021. Employers with fewer than 500 employees, both full-time and part-time, are eligible for the credit.
To calculate the amount of the credit, you must first determine your Qualified Wage amount (QW). Qualified Wages include wages paid in 2020 or 2021 to an employee who worked in 2020 but not in 2021. It also includes employer contributions, made on behalf of certain employees enrolled in health insurance coverage offered by the employer at any time during the taxable year beginning after December 31 and before Jan 1, 2022. With regards to multistate employers, qualifying wages are allocated on a ratable basis based on employee time worked throughout all states.
Next you need to subtract any amounts that have been credited under another provision of law such as applicable credits available under section 3111(a) or 3139(a) of Internal Revenue Code from the qualified wages. This amount is then multiplied by 70% and additional 50% if applicable to give you your ERTC eligible wage cost for each quarter or six months as appropriate. The resulting figure is then multiplied by an applicable percentage stipulated for each quarter wage cost which can range from 50%-70%. This will give you your ERTC claim amount for each quarter which can be claimed cumulatively or separately through ERCR quarterly form used to report information regarding ERTC wage costs and claimed credits when filing Form 941 quarterly return for applicable quarters of 2020 & 2021.
How to Claim ERTC
The Employee Retention Tax Credit (ERTC) is a tax credit that is available to employers to help offset the cost of retaining their employees during the COVID-19 pandemic. Employers may qualify for a credit up to the lesser of three times the employer’s average monthly qualified wages or $5,000 per employee. To claim the credit, you must apply for the credits through your payroll tax reporting process.
Let’s look at how you can claim the ERTC:
For businesses looking to claim the Employee Retention Tax Credit (ERTC) for 2021, there are some steps you need to take. One of the steps is filing Form 941, Employer’s Quarterly Federal Tax Return. This form will report the company’s withholding and pay period details, as well as details related to wage and compensation expenses and taxes that qualify for the ERTC.
You must file Form 941 if you had gross wages, tips reported to the IRS on Forms W–2, health insurance premiums paid to a third party, vacation pay or other non-cash compensation payments made in the calendar year that you are claiming for. If all required information has not been reported on these forms, Form 941 may need to be filed with additional information and documents attached. You can use Part 1, 3 or 4 of this form depending on what type of ERTC tax credit you are claiming – ERTC based on wages and salary payments or Qualified Health Plan Expense Credit reimbursement.
Be sure to provide all applicable details when filling out Form 941 and double check your information before submitting it – any mistakes or omissions can lead to an incorrect calculation that can cause costly delays in receiving your tax credits!
Employers are eligible to claim the 2021 Employee Retention Tax Credit (ERTC) by filing internal revenue service Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees. This document is used to report employees’ wages and taxes withheld.
Businesses that are not otherwise required to file Form 943 must file it if they wish to claim the credit on wages paid in 2020 or 2021. The amount of credit businesses can claim is a percentage of qualified wages paid up to $10,000 for each employee for the entire tax year, so any wages and tips earned in excess of this limit will not be eligible for the ERTC. Employers should also keep records of payments made and wages claimed under the ERTC program in case their return is audited by the IRS.
The federal government created the ERTC to protect jobs during the economic downturn brought on by COVID-19. Small businesses, nonprofits, tribal businesses, self-employed individuals and employers that did not receive loan proceeds from certain other programs may be eligible to receive a credit worth up to 70% of certain qualified wages per employee per quarter – up to a maximum amount per quarter and maximum annual limit depending on employer size. To qualify for this important form of financial relief, employers must meet several criteria as outlined in IRS Notice 2020-21.
Form 944 is an IRS form used by employers of fewer than 10 employees to report their total federal income tax for the calendar year. Employers filing Form 944 must provide the following information:
- The employer’s legal name, address, and tax-ID number;
- The total amount of wages paid during the tax period;
- The total amount of taxes withheld during the tax period including federal income tax, social security and Medicare taxes (FITW), Reemployment Taxes (FUTA), Railroad Retirement Tax Act (RRTA), and income taxes withheld from nonresident alien employees;
- The total amount of bank deposits made during the period;
- Any other information necessary to calculate the correct withholding liability.
Form 944 should be prepared and filed with the Internal Revenue Service each year no later than January 31st following when wages were paid. It must be signed by an authorized officer or agent for the business entity submitting it. Additionally, employers using Form 944 may need to complete Form 941-X or Form 5884-C to claim their Employee Retention Tax Credit (ERTC) for 2021.
The Employee Retention Tax Credit 2021 is a new tax credit benefit that aimed to help employers retain their employees during the pandemic. This tax credit is especially beneficial to those who are facing financial struggles because of the pandemic. This tax credit can be used to offset payroll taxes and can provide a significant help to those companies who are struggling to keep their employees on their payroll.
Let’s take a look at the conclusion of this article.
Summary of ERTC
The Employee Retention Tax Credit (ERTC) is a refundable tax credit specifically created in response to the COVID-19 pandemic. This type of credit is designed to help businesses affected by the pandemic by providing financial relief and incentivizing them to keep employees on their payrolls. It applies to eligible employers who experience a full or partial suspension of operations due to COVID-19 related orders issued by government authorities, or for employers whose gross receipts decline significantly (as defined in Section 2301(a)(3)).
The ERTC was established under the CARES Act in 2020 and has recently been augmented with additional benefits from the American Rescue Plan. Key features of this plan include:
- Up to $7,000 per employee per quarter for qualified wages and health care costs.
- An expansion of eligibility for employers who experienced a 20% decline in gross receipts during 2021 compared with 2019.
- Higher reimbursement rates for large businesses with over 500 employees.
Overall, the ERTC provides financial assistance through tax credits that qualify businesses when they retain payrolls during hardships caused by the pandemic. It can be a great benefit to small business owners who have had difficulty maintaining their staff due to reduced revenues due to COVID 19 restrictions. With this program many companies are able take advantage of needed financial relief while supporting their employees at large expense savings overall.
Resources for Additional Information
Employers have a lot of questions about the Employee Retention Tax Credit 2021. This credit program helps employers to keep employee wages above certain levels. It is important to understand the details and nuances regarding how this program works, the documentation needed to be eligible and how employers may claim a refundable tax credit.
To help employers gain more information, below are several resources that can provide additional information:
- IRS website: The Internal Revenue Service (IRS) provides information about the ERTC program on their website https://www.irs.gov/credits-deductions/employee-retention-tax-credit.
- Small Business Administration (SBA) website: The SBA offers answers to frequently asked questions as well as documents needed to apply for the ERTC at https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/employee-retention-credit.
- American Payroll Association (APA): APA brings together payroll professionals who help answer customer questions related to the federal credit program at https://www2.americanpayrollassociation.org/2020SiteCoreImageFiles//Trump_signs_ERC_FAQs_05052020%20(2).pdf.