The Employee Retention Tax Credit is a refundable and timely incentive for employers to help them retain existing employees and keep them on the payroll during economic downturns and economic crises. It is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 and is designed to help employers keep their operations running and workers employed.
Let’s delve into this topic and discuss what the Employee Retention Tax Credit entails and how it can help employers offset their payroll costs:
Definition of Employee Retention Tax Credit
Employee Retention Tax Credit (ERTC) is a federal tax credit that is temporarily available through the end of 2021 for businesses impacted by the coronavirus pandemic. The ERTC covers 50% of up to $10,000 in wages and health care costs paid to each employee during the year. It is designed to provide a financial incentive for businesses affected by the pandemic to keep employees on their payroll and potentially rehire those who have been laid off due to lost business.
Eligible wages include both cash wages paid as well as amounts employers pay towards employee healthcare plans. Businesses must meet certain eligibility requirements in order to be eligible for the ERTC, such as having operations that have been fully or partially suspended due to COVID-19 restrictions, or suffering gross receipts decline of more than 20%, compared to the same quarter in 2019. The credit will begin being applied after January 1, 2021 and can be used with other relief programs such as Paycheck Protection Program (PPP) loans or credits.
The Employee Retention Tax Credit is an incentive for employers to keep their staff on payroll when their businesses have been affected by the pandemic. In order to be eligible for the Employee Retention Tax Credit, you must meet certain requirements such as:
- Having a full-time employee
- Providing health care coverage
- Demonstrating a decline in gross receipts
Let’s look at these eligibility requirements in more detail.
Who is eligible for the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is designed to help employers that are facing financial hardship due to the COVID-19 pandemic by providing them with a tax credit for keeping their employees on the payroll. To be eligible for the ERTC, employers must meet certain criteria.
Generally, any employer whose operations have been partially or fully suspended due to COVID-19 orders from a governmental entity, or whose gross receipts have declined significantly compared to 2019 is eligible for the ERTC. Certain nonprofit organizations and tribal employers are also eligible.
The ERTC provides a credit equal to 50% of qualified wages paid to an employee after March 12, 2020 and before January 1, 2021 up to $5,000 per employee. To be eligible, an employee must perform services in a trade or business where the employer’s operations have either been fully or partially suspended because of illness or quarantine due to Covid-19; OR experience substantial decline in gross receipts (greater than 50%). Qualified wages include wage payments made between March 12 and December 31st of 2020 that do not exceed $10,000 for all quarters combined. This applies only for each individual employee receiving those wages; so it does not include wages paid to family members.
Ineligible Employers and Employees
Certain employers and employees are ineligible for this tax credit including self-employed individuals seeking relief through Paycheck Protection Program as well as certain employers receiving other federal assistance related to payroll matters such as loans through SBA’s Economic Injury Disaster Loan Program (EIDL), EIDL grants or awards from other federal programs that are primarily intended for payroll related purposes. In addition, publicly traded companies where securities are traded on an established securities market and federal entities are not eligible employers under this program. For more information about ERTC eligibility requirements please consult with your tax advisor.
How to qualify for the Employee Retention Tax Credit
The Employee Retention Tax Credit is a refundable credit available to employers who have experienced certain operating losses or the inability to fully operate due to COVID-19. To qualify, employers must meet one of two tests:
- Experiencing a significant decline in gross receipts during a calendar quarter compared to the same quarter in 2019, or
- Being ordered to suspend operations by governmental guidelines due to COVID-19 during a given calendar quarter.
Businesses must also meet certain other criteria:
- The business must have been in operation since January 1, 2020 and not be ineligible for the tax credit.
- The business can’t be considered tax exempt or part of an affiliated group of corporations with common control (defined as more than 50% of the stock is owned by the same interests) which have more than 500 employees total;
- At least one employee must be employed at any time during each calendar quarter when attempting to claim the tax credit; and,
- No amounts previously received through forgiveness of Paycheck Protection Program (PPP) loan proceeds nor other federal pandemic assistance can be used towards expenses taken into account when claiming this tax credit.
If you meet these eligibility requirements, you may be eligible for an Employee Retention Tax Credit based on paid wages during one or more calendar quarters as follows:
- 50% for wages up to $10,000 paid per employee per year; and,
- 25% for wages paid over $10,000 but up to $26,000 per employee per year.
Benefits of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a tax credit created by the CARES Act in response to the coronavirus pandemic. It provides financial relief to employers by providing a tax credit for certain wages paid to employees. The credit is available to employers who are currently experiencing economic hardship due to the pandemic, and it can be used to cover up to 50% of an employee’s wages.
Let’s explore the benefits of the ERTC in detail:
How much can you save with the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was part of the CARES Act and is an enhanced version of the Work Opportunity Credit. Employers are eligible for a refundable tax credit if they retain their employees during the COVID-19 pandemic and keep them on their payroll. The credit is available for wages paid between March 13, 2020, and December 31, 2020.
- For employers with fewer than 100 full-time employees in 2019, all wages paid qualify for the credit – up to $5,000 per employee per year.
- For employers with more than 100 full-time employees in 2019, only wages that exceed 50% of what was paid in Q2 of 2019 qualify – up to $10,000 per employee for 2020.
The ERTC gives employers a break from payroll taxes equal to 50 percent of qualified wages paid between March 12 and December 31. Qualified wages include health care expenses but do not include qualified sick or family leave wages eligible for a separate credit under the Families First Coronavirus Response Act (FFCRA). Even if an employer doesn’t owe payroll taxes due to other credits such as the FFCRA credits or the patronized business credits, it still may be able to benefit from this tax break if it incurred wage costs for which it wouldn’t otherwise receive a federal benefit.
The employer can elect when claiming WOTC or the ERTC to report both on Form 5884-C; however, many employers will likely only claim one or the other based on which one provides them with greater benefits. It is important to point out that claiming both could offset each other depending upon circumstances but should be analyzed through careful examination by a tax professional.
What other benefits does the Employee Retention Tax Credit provide
The Employee Retention Tax Credit (ERTC) is a tax credit enacted by the Coronavirus Aid, Relief and Economic Security (CARES) Act in response to the COVID-19 pandemic. Employers of all sizes are eligible for this refundable tax credit that helps employers defray some of the costs in retaining employees during certain periods of economic hardship.
Aside from providing eligible employers with a valuable tax credit, employers can take advantage of other benefits provided by the Employee Retention Tax Credit. These benefits include:
- Expanded health care coverage. The CARES act expanded eligibility requirements for health care coverage up to 11 weeks and allows applicable employers to receive reimbursement in the form of an Internal Revenue Code Section 45S gross payroll tax credit for qualified wages and health care expenses incurred between March 13, 2020 and December 31, 2020.
- Reduced employee turnover rates. By encouraging companies to retain their employees, ERTC increases employee satisfaction, reduces labor costs associated with recruiting new staff members and training them, decreases costs related to job postings and initial onboarding expenses, as well as decreases overall levels of waste caused by high turnover rates. It is one way for businesses to show appreciation to their loyal employees during an unprecedented global crisis.
- Lower payroll taxes. Employers are eligible for a 7.65% payroll tax credit up to $5k per employee per quarter if they decide not lay off or reduce hours due to COVID-19 related business downturns or coronavirus related challenges such as relying on social distancing measures or abiding by public health orders imposed due to the pandemic crisis. Businesses may be able use this incentive as an alternative option that allows them stay afloat while continuing operations without reducing staffing levels substantially or lay people off unnecessarily.
How to Claim the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a refundable tax credit that businesses can claim to reduce their payroll tax liability. Eligible employers can receive up to $5,000 in tax credits per employee for eligible wages paid to employees in 2020.
This section will go into further detail of how to claim the ERTC.
What forms are needed to claim the Employee Retention Tax Credit
Filing for the Employee Retention Tax Credit (ERTC) can be done in two ways: either through the filing of IRS Form 941 (Employer’s Quarterly Federal Tax Return) or through the filing of IRS Form 5884-C (Employee Retention Credit for Employers Subject to Closure or Experiencing Economic Hardship).
Form 941 requires employers to report wages and other compensation paid, credits and taxes withheld, as well as other taxes due. Additional information concerning past-year wages including amounts earned, taxed income and Social Security number may be required. Employers should attach an amended Form 13614-C to document their eligibility criteria when filing Form 941.
Form 5884-C requires employers to provide information regarding their employee retention credit calculation, such as the amount of allowable expenses previously subtracted from gross income, any applicable limitations on total available credit amount and a summary worksheet of all qualified wages with separate boxes for qualified wages earned before, during and after December 31st, 2020. If more than one business location is eligible for ERTC, employers should submit separate filings for each claimable location.
In order to receive ERTC refundable credits employers must also file IRS Claim Forms 940 (Employer’s Annual Federal Unemployment Tax Return), 1040-X (Amended U.S Individual Income Tax Return) or 1045 (Application for Advance Payment of Refundable Credits). For more detailed guidance on how to correctly report income when claiming ERTC employers should consult a tax professional or review Internal Revenue Service Publication 1583-A/B/C (Recording Wages Paid from January 1st through December 31st).
How to apply for the Employee Retention Tax Credit
To apply for the Employee Retention Tax Credit, eligible businesses need to submit Form 941-X Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, which can be completed and submitted through the Internal Revenue Service’s electronic filing system.
The form includes your employee information as well as the wages paid during each quarter in which you claim the credit. Your accountant or tax preparer can assist you with submitting the form. In addition, before filing it is necessary to gather records about wages paid such as W-2 forms and paycheck stubs.
The following requirements must be met in order to qualify for this credit:
- The business must have reduced its payroll due to economic hardship caused by COVID-19.
- The business must have fewer than 500 employees during 2020.
- The credit applies to wages paid on or after March 13, 2020 and before January 1, 2021.
It’s important to note that businesses claiming this credit cannot take advantage of other credits related to wages paid such as the Work Opportunity Tax Credit (WOTC) or employer Social Security tax deferment available under § 2302 of the CARES Act while they are utilizing this tax credit. In addition, there are anti-discrimination provisions that may impact small business owners when considering who is eligible for this credit; guidance for those situations can be found here.
In conclusion, the Employee Retention Tax Credit can be a powerful tool to help businesses weather a difficult economic climate. It can provide a financial incentive to employers who keep their employees on the payroll, which can help to retain valuable employees and their skills, as well as avoid potential layoffs.
This can be a great way for businesses to get the financial assistance they need and the peace of mind in knowing their employees are taken care of.
Summary of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a tax credit available to eligible employers who keep their employees and pay wages during the COVID-19 pandemic. This federal credit was created as part of the CARES Act as an incentive for businesses to retain employees and meet payroll. The ERTC is available for qualified wages paid from March 13, 2020 through December 31, 2020.
Eligible employers include those who have had operations partially or fully suspended due to a COVID-19 related government order, and those whose gross receipts have declined by more than 50% compared with the same quarter in 2019. To be eligible for the ERTC, employers must pay qualified wages and must have fewer than 500 full-time employees on average to receive full relief. Employers may also take advantage of special provisions that allow certain large companies to use the credit in addition to using Paycheck Protection Program loans.
Under this program eligible employer can claim two types of credits:
- A refundable credit up to 50% of qualified wages up to $10,000 per employee;
- If taken in conjunction with PPP funds can claim a non-refundable tax credit for all other qualified wages not exceeding $10,000 per employee over the course of the year/quarter covered by PPP funds/tax credits).
Employers should carefully weigh their options between PPP loans and ERTCs as differences in eligibility criteria, amounts received time frames still exist between them both when it comes down to claiming either one Credit or the other tax benefits..