Introduction to the Employee Tax Retention Credit
The Employee Tax Retention Credit, also known as the Employee Retention Credit (ERC), is a federal tax credit that helps businesses retain and hire employees despite the financial repercussions of the COVID-19 pandemic. Through the ERC, employers are eligible to receive a fully refundable tax credit of up to $5,000 per quarter per employee in 2021.
In this article, we’ll provide an introduction to the Employee Tax Retention Credit and explore its:
- Eligibility requirements
- How to claim it
Overview of the Employee Tax Retention Credit
The Employee Retention Credit (ERC) was established in March 2020 through the Coronavirus Aid, Relief, and Economic Security (CARES) Act to incentivize businesses to keep employees on the payroll amidst a pandemic-induced recession. The ERC is designed to provide businesses with a credit for wages paid for each calendar quarter so long as the employee remains employed by the end of that quarter.
Eligible employers will be able to claim a tax credit against their employer-portion of Social Security taxes equal to 50% of wages charged from March 12th, 2020 through December 31st, 2020 until the credit reaches $5,000 per employee in wages paid (not including health benefits), up to an aggregate limit of $7,000 per employee during that period. Eligible employers may also take their credit against certain alternative payroll taxes instead of Social Security taxes.
The CARES Act provides two distinct sets of rules based on employer size:
- Employers with fewer than 100 average full-time employees during 2019 are allowed to qualify for ERC by taking into account all employees regardless if they are furloughed or laid off as long as they were not employed at any point during that calendar quarter; and
- Employers with more than 100 average full time equivalent employees during 2019 must still have kept their employee(s) on the payroll in order to qualify for ERC and be able to calculate the credit based only on wages or health benefits paid or incurred by those still employed.
The employee tax retention credit (established under the Coronavirus Aid, Relief, and Economic Security Act) provides a refundable tax credit for employers equal to 50% of qualified wages paid to employees from March 13, 2020 through December 31, 2020.
In order to be eligible for the credit, employers must meet certain requirements regarding eligibility for the Paycheck Protection Program and their decrease in gross receipts during the applicable quarters.
- First, employers must have participated in the PPP at any point in 2020 and have used or will use all PPP funds received before claiming wages qualifying for the Employee Tax Retention Credit.
- Additionally, employers are only eligible if they experienced a “significant decline” in gross income during one of three applicable quarters: Q2 2020 compared with 2019; Q3 2020 compared with 2019; or Q4 2020 compared with Q4 2019. The exact amount of income considered sufficient depends on employer size – greater than 50%, or 20% to less than 50%.
How to Claim the Employee Tax Retention Credit
The Employee Tax Retention Credit is a generous incentive put in place by the government to help employees who are still employed while their business is struggling due to the pandemic. The credit is designed to help businesses keep their employees on payroll, helping them remain resilient despite economic disruption.
This article will discuss how to claim the Employee Tax Retention Credit and what the eligibility requirements are. Getting this credit can help businesses save money as they navigate the uncertain economic environment.
Calculating the Credit
The Employee Tax Retention Credit is a refundable credit that is available to employers for 50% of qualified wages and health plans coverage expenses paid from March 12, 2020 to December 31, 2020. The credit is calculated as the sum of two components:
- Qualified wages – Generally, this component consists of qualified wages paid to an employee for time worked during the period from March 13, 2020 through December 31, 2020 (up to $10,000 in wages per employee). Eligible employers can claim an amount that is equal to 50% of the employer’s qualified wages paid during that period up to a maximum credit of $5,000 per employee. The use of Form 941-X and IRS Notice 2021-14 are necessary to correctly calculate the amount of the credit.
- Health plan expenses – Employers may claim a credit equal to 50% of qualified health plan expenses allocable to eligible employees’ medical care benefits provided during a period beginning on March 1, 2020 and ending within one year after December 31, 2020. The maximum amount allowed for each employee’s health benefits coverage is $500 per quarter or two times the rate which payroll taxes were paid with respect to those employees’ Qualified Wages (up from 1.45%), whichever is less. As with the calculation for Qualified Wages above Form 941-X and IRS Notice 2021-14 will be utilized when claiming this portion of the credit.
Filing the Credit
Claiming the Employee Tax Retention Credit requires paperwork regardless of the size of business claiming it. The Internal Revenue Service (IRS) requires that businesses filing this credit provide a schedule to report wages and health plan expenses for completing Form 8994, as well as records to get the credit allowed. This information must be submitted to the IRS either with Form 941 quarterly tax return or by filing an amended return.
For businesses with fewer than 100 employees, no additional documentation is required other than maintaining records of coronavirus-related qualifying wages and health benefit expenses. For businesses with 100 or more employees, however, additional documentation may be needed for employers to receive the employee retention credit to include:
- Payroll documents that prove eligibility for employer credits;
- Documentation showing how PPP loan funds were used;
- Proofs that wages paid were primarily from retained income in 2020; and
- Other charts or tables explaining their calculations of eligible payroll costs and apportionments claimed in a quarter.
Benefits of the Employee Tax Retention Credit
The Employee Tax Retention Credit is a tax credit designed to help protect businesses from hiring and retaining employees. It allows businesses to receive a credit for each employee they hire and retain on the payroll. This tax credit can be a great way to incentivize businesses to retain their employees which can be a benefit to businesses and workers alike.
Let’s take a look at the specific details and benefits of the Employee Tax Retention Credit:
Increased Cash Flow
The Employee Tax Retention Credit (ETRC) is designed to help businesses weather the economic storm caused by the global pandemic. The credit allows eligible employers with full-time employees to defer the payment of Social Security taxes and then receive a refundable credit for the payments. This, in turn, helps these employers maintain cash flow and keep their employees on their payrolls.
The ETRC also incentivizes businesses to bring back furloughed workers or rehire recently laid-off workers prior to December 31, 2020, who may be disconnected from their previous roles by providing a higher tax rebate on wages paid during 2021. The credit is casted at varying rates based on employee salary level, ranging from 6.2% of gross wages up to $5,000 per employee each quarter of 2021.
The ETRC is an incredibly useful tool for businesses operating without their usual levels of liquidity or revenue due covid-related business shutdowns and restrictions. By allowing companies to obtain loan capital with offsetting tax payments that can be refunded when wage and employment liabilities are met during 2021 quarterlies, many entities are able to bridge the gap in payments until normal economic conditions resume.
Lower Tax Liability
The Employee Tax Retention Credit is a program implemented in 2020 by the US federal government to incentivize employers to retain their employees during the COVID-19 crisis. Eligible employers can qualify for a refundable tax credit of up to $5,000 per employee for wages paid between March 12, 2020 and December 31, 2020. This credit allows employers to reduce their tax liability which will in turn help them maintain their operations.
The credit is equal to 50% of the qualified wages that an employer pays in a calendar quarter, up to $10,000 per employee for all four quarters; or a maximum of $5,000 per employee for the year. Qualified wages include employee health benefits and certain retirement plan costs over and above what was paid in 2019. The taxpayer must have also experienced significant declines in their gross receipts during the quarter due to COVID-19 compared with either 2019 or years prior.
Careful consideration should be taken when evaluating whether this credit applies as it is subject to IRS rules and regulations that may change as time goes on. For more information on how this helpful credit can lower your tax liability please consult with a qualified accountant or financial planner.
Through this article, we have learned about the ins and outs of the Employee Tax Retention Credit. We have seen that the credit is available for eligible employers and can be used to offset their payroll taxes for up to five quarters. We have also seen the different qualifications and eligibility requirements that employers have to meet in order to qualify for the credit.
To conclude, the Employee Tax Retention Credit can be a great way for eligible employers to save on payroll taxes.
Summary of the Employee Tax Retention Credit
The Employee Retention Credit is a refundable tax credit for employers that are affected by the COVID-19 pandemic. This program provides eligible employers with a fully refundable tax credit for qualified wages up to $5,000 per employee and up to $10,000 total per employee for the entire two-year period. The amount of the credit depends on the average number of employees employed in 2020 when compared to 2019. Employers can use Form 941 or Form 941-X to claim this credit and receive their refund.
To qualify, employers must experience either complete or partial suspension of business operations due to governmental orders related to COVID-19 or experience at least a 50% reduction in gross receipts during either Q1, Q2 or Q3 of 2020, when compared with the same quarter in 2019. Eligible wages are all wages paid between 1/1/20 and 12/31/27 and do not have to be paid concurrently with employment. Employers can claim retroactive refunds from as early as January 1st, 2021 on any qualified wages paid after March 12th, 2020.
The Employee Retention Tax Credit provides an important opportunity for businesses affected by COVID-19 to reduce their cost of operation and support financial stability during this difficult economic time. By filing Form 941 or 941-X employers can qualify for this tax credit which could significantly reduce their costs over time.
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