Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was introduced as part of the Coronavirus Aid, economic Security & Relief Act (CARES Act). It is designed to help employers retain employees and offer financial support during the pandemic. The ERTC offers a refundable credit for 50-70% of eligible wages incurred between March 13, 2020 and January 1, 2021.
Let’s look at the specifics of the ERTC:
What is the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a tax credit available to employers of all sizes, including businesses, nonprofits and government entities. The ERTC’s purpose is to help companies pay wages, health benefits and retirement plan contributions to their employees during the COVID-19 pandemic.
Eligible employers may be able receive refundable tax credits through certain payroll related expenses, including qualified wages paid between March 13, 2020 and December 31, 2020; as well as discretionary health care costs (including employer-sponsored insurance premiums). The amount of the credit depends on the number of employees employed by the employer; and if they meet specific criteria more than 1/2 of their gross income must come from providing services or other unrelated trade or business activities in order for the employer to qualify.
In addition to qualifying for the ERTC via payroll taxes, some employers may also be eligible to use other forms of aid such as Small Business Interruption Loan (SBAIL). Employers should consult with professional financial advisors before applying for any type of aid.
To utilize the ERTC on payroll taxes an employer must have experienced one or both of two circumstances:
- Experienced a full or partial suspension due to government orders related with COVID-19
- Experienced significant gross receipts declines from quarter from 2019 equal to 50% compared with previous quarters in 2020.
The ERTC is scheduled to end December 31st, 2020 for taxable years ending after that date. Employers who wish to take advantage of this incentive should consult a professional economic advisor or accountant well in advance in order stay up with changes made by Congress related with eligibility requirements and tax credits.
Who qualifies for the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a refundable tax credit of up to $5,000 per employee, available for businesses that have experienced one of the following conditions: reduced gross receipts in a quarter compared to the prior year, or an order from a governmental body that requires the business to either cease operation or reduce operations. The ERTC was created in 2020 and is available through December 31, 2021.
To be eligible for the ERTC, employers must meet certain criteria:
- Have operations that have been suspended (due to a government mandated shut down) during any calendar quarter in 2020 or 2021 or had gross receipts decline by more than 20 percent when compared to the same quarter of 2019.
- Qualified wages paid after March 12, 2020 and before January 1, 2022 are eligible for ERTC.
- Businesses with no more than 500 employees per physical location are eligible for ERTC. Corporate groups are capped at 500 employees but each member would need to separately track employees and wages paid at each location.
- Certified Professional Employer Organizations (CPEO), which provide payroll services and perform human resource functions on behalf of their employers’ clients, may qualify employers as long as they are not part of an aggregated group controlled by commonownership meeting certain size standards under Internal Revenue Code 414(q).
- Employers across all industries can qualify for the employee retention tax credit regardless of sector or industry affiliation.
The Employee Retention Tax Credit (ERTC) was designed to provide relief to businesses affected by the coronavirus pandemic. The ERTC allows many employers to claim a tax credit on wages paid to employees throughout the year.
To be eligible for the ERTC, businesses must meet certain criteria. In this section we will look at the eligibility requirements for the ERTC and when the credit will expire.
Gross receipts test
The gross receipts test is an important component in helping to determine if a small business is eligible to apply for a certain loan or grant program. Businesses must meet a certain minimum amount of profits, or gross receipts, within their fiscal year in order to qualify for such programs. Gross receipts refer to the total annual income of the business resulting from normal trade activities, such as sales and service, and before any deductions are taken for taxes and other expenses.
In particular, some loans or grants require a minimum of $250,000 in gross receipts over the previous tax year and others may require a much higher amount. Depending on the specific program you’re interested in applying for, it’s important to review all requirements in order to understand if your business meets this threshold before submitting an application. This will help maximize your chances of successfully qualifying for financial aid by meeting eligibility criteria established by lenders or grant providers.
Full-time employee test
To qualify for the Employee Retention Tax Credit, a business must meet certain eligibility requirements. One such requirement is the Full-time Employee Test. Employers must have an average of more than 100 full-time employees in 2019 to be eligible for the credit. For employers subject to the Americans with Disabilities Act (ADA) or the Family and Medical Leave Act (FMLA), only employees employed prior to March 13, 2020 count towards this average.
Full-time employees are individuals who are employed on average at least 30 hours per week in any given month in 2019 or during any calendar quarter period in 2020. Employees that take Paid Family Leave Contracted Employees (or similar arrangements) for at least three months of an employer’s Payroll Period count towards determining the full-time employee measure. Additionally, “Common Law Employees” and independent contractors who worked full time, on average, at least 30 hours per week qualify as full time under this test.
Wages paid test
The wages paid test is an eligibility requirement used to determine a worker’s status as an employee or an independent contractor. To pass the test, the worker must receive at least 80% of their income from one employer over a three month period. The remaining 20% can come from other sources, such as investment returns, but is still subject to taxation as reported on the W-2 or 1099.
In addition, the wages paid test requires that the employer provide at least 90% of all payroll related expenses such as health insurance and Social Security contributions for their workers to be considered employees rather than independent contractors. In order to be classified as an employee, there must also be evidence of managerial control over how the work is performed and indications that the work is posing a risk for the employer.
Finally, if any of these criteria are not met – meaning workers are not receiving sufficient payment from a single employer – then they may be classified as an independent contractor and thus ineligible for employment benefits and protections under applicable state or federal laws. The application of this wages paid test determines whether an individual has “employee” or “independent contractor” status for tax purposes.
Maximum Credit Amount
The Employee Retention Tax Credit (ERTC) helps businesses who have been affected by the pandemic receive a credit on qualifying wages. However, understanding the maximum credit amount as well as when the credit ends can be tricky.
In this article, we will discuss:
- The maximum credit amount.
- When the credit ends.
Maximum credit amount for employers with more than 100 full-time employees
For employers with more than 100 full-time employees, the maximum employee retention tax credit is equal to 70% of qualified wages (up to $10,000) paid for each employee for the calendar quarter. The total credit for any quarter cannot exceed $7,000 per employee. The In addition, employers must make a good faith effort to document that their business operations have been fully or partially suspended due to orders from a governmental authority due to COVID-19 issues.
The credits are also subject to certain rules and regulations related to:
- averaging the number of full time employees
- determining whether wages qualify as “qualified wages”
- other limitations relevant to its availability.
A detailed analysis of these rules and regulations should be undertaken before claiming the credit in order to ensure compliance with applicable tax laws.
Maximum credit amount for employers with 100 or fewer full-time employees
For qualified employers with 100 or fewer full-time employees, the maximum payroll tax credit amount is $7,000 per quarter. The credit is meant to incentivize small businesses to retain their existing employees and avoid layoffs in 2021.
The maximum credit amount begins to decrease when an employer has more than 100 full-time employees: For employers with 101-500 full-time employees, their maximum quarterly tax credits are reduced by an amount equal to the number of full-time employees over 100. For example, an employer with 150 full-time employees would receive a maximum quarterly credit of $5,500 (or 150 x $37 = $5,550).
Moreover, for employers with 501 or more employed workers are not eligible for this tax credit. As such, it’s critical for employers to understand how many and which employee types qualify for the benefit and which do not in order to ascertain the exact amount of their available credits. The Internal Revenue Service (IRS) has helpful information about how employers can calculate their eligibility and credits when filing taxes.
Duration of the Credit
The Employee Retention Tax Credit was created on March 18, 2020, and was created to help employers keep employees on payrolls during the coronavirus pandemic. The credit is available to employers whose businesses have been affected by the crisis and had to either suspend operations or experience a decline in revenue. Both employer Social Security taxes and income taxes are eligible for the credit.
Let’s explore the duration of the credit:
Credit availability for 2020
Credit availability for 2020 depends on various factors, such as the credit institution, amount requested, and borrower’s creditworthiness. Generally speaking, individuals may be eligible to access short-term financing with repayment periods ranging from 12 to 60 months.
Some lenders may even offer longer repayment periods, such as up to 84 months (7 years). It’s important to note that each lender will have different terms and conditions associated with credits granted.
For loans that require collateral, such as a home loan or car loan, the time period offered may depend on the item being purchased and additional details of the loan. For example, many car loans have an upper limit of 60-month terms due to potential depreciation of the car over time.
It’s recommended that borrowers work with a lender whom they trust to advise them regarding their options for financing based on their specific situation and goals. In some cases, it may make sense to pursue alternative routes for financing before opting for a long-term credit agreement with stringent requirements and potentially high interest rates.
Credit availability for 2021
The Employee Retention Tax Credit is available for 2021. The credit applies for wages paid from January 1, 2021 through December 31, 2021. Eligible employers may claim the credit for wages paid after March 12, 2020 and before January 1, 2022 in respect of certain qualified wages. To be eligible for the tax credits, employers need to meet certain criteria related to operating a business affected by the COVID-19 pandemic as defined by the United States Department of Treasury. The maximum aggregate amount of all wages eligible for credits in 2021 is $10,000 per employee, per calendar year.
The Employee Retention Tax Credit is a nonrefundable tax credit equal to 50% of up to $10,000 in qualified wages that employers pay employees during either the first or second quarter of 2021 (i.e., January to March or April to June). To qualify for the tax credit, an employer must have experienced a full or partial closure due to government orders related to COVID-19 business restrictions and/or experienced a dramatic decline in gross receipts during 2021 when compared with prior years (down 50% quarter-over-quarter or down 20% year-over -year).
Employers may opt out of claiming the Employee Retention Tax Credit and apply instead for a Paycheck Protection Program loan between January 1 and March 31st or choose not to take either option and take no other action until their filing deadline arrives on April 15th.
How to Claim the Credit
The Employee Retention Tax Credit (ERTC) provides businesses with a credit against their 2021 and 2020 federal quarterly employment taxes. The ERTC covers up to $5,000 in wages per employee and is capped at $7,000 per employee on a quarterly basis. The credit can be claimed on behalf of eligible employees up to the end of 2021.
In this section, we will discuss how to go about claiming the credit and the relevant information needed:
Form 941, also known as the Employer’s Quarterly Federal Tax Return, is an important form for employers who must report taxes withheld from employees on a quarterly basis. The credit allowed in Form 941 can provide invaluable assistance to businesses impacted by the coronavirus disease (COVID-19), as it may cover part or all of certain payroll taxes paid in the second, third, and fourth quarters of 2020. To take advantages of available credits and deductions when completing Form 941, employers should understand the IRS rules and regulations surrounding these credits and deductions.
The credit for Employee Retention has a wide range of qualifications that must be met for an employer to claim it on their Form 941. To qualify, employers must have seen either a full or partial suspension of operations due to government shutdowns related to COVID-19 or experienced at least a 50% reduction in gross receipts when compared to the same period one year prior. In addition, businesses with 500 or fewer employees are eligible to apply for this credit if they pay not more than $10 million in aggregated wages each year (comparing 2019 wages with 2020). Employers must include their average number of full-time and part-time employees they both employed during the period from February 15 through June 30th ,2020 and from July 1 through December 31st ,2020; as well as wages paid after March 12th , 2020 but before January 1st , 2021. They should also note that this credit can be earned on up to $5,000 per employee during any given quarter (maximum $28,000 per employee).
Many companies have benefited from this new tax credit during 2020; it is crucial for businesses affected by turbulent times like these to stay informed about related tax policy changes that could offset potential losses due to negative financial conditions incurred throughout the course of COVID-19. By using day time auditors such as HURDLE Auditing Corporation or online resources like A&A Tax Risk Management Services at ArthurLarsonTaxServices.com, employers can raise awareness when considering how best to make use of available federal aid opportunities while computing Form 941 every quarter.
The employer’s quarterly federal tax return, Form 941-X, must be filed to claim the credit. This form is normally filed annually but is used to make adjustments or corrections to taxes previously reported in Form 941. Employers who need to adjust prior quarter information can use this form to make the corrections.
The form asks employers to provide details on their gross wages that were paid during the first two quarters of 2020 and any credits claimed such as the Employee Retention Credit (ERC) and any Other Credits (OC). Special instructions are provided for qualifying large employers on the back of Forms 941-X that must be noted when filing.
Employers have three years from the original due date for a Form 941 filing period in which to file a claim for refund or credit associated with an ERC or OC. Therefore, employers may have time until late 2024 or beyond for filing a Form 941-X for any weeks claimed in 2020 as part of an ERC or OC tax credit.
In order to claim the Employee Retention Tax Credit, employers must complete and file Form 1040-X, Amended U.S. Individual Income Tax Return, along with Form 941, Employer’s Quarterly Federal Tax Return or Form 944, Employer’s Annual Federal Tax Return. A separate amendment will need to be filed for each of the quarters in which an employer wants to claim the credit. The amount of the credit must then be reduced from any other current year credits or overpayments claimed on that form and allocated to each quarter of payment.
Form 1040-X must include a statement that “Employee Retention Credit [is/is not] being claimed on this amended return due to (list applicable provisions)” and documentation that supports all claims made on the amended return. To ensure accurate processing times it is important that the forms are completed and mailed to the IRS address specified on Form 1040-X instructions by December 31st 2021.