Overview of Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a federal tax credit available to employers to defray some of the costs associated with retaining or hiring employees. The ERTC was designed to help businesses impacted by the COVID-19 pandemic.
In this overview, we’ll cover details of the credit, who can claim it, and when it will be available.
Businesses who have experienced revenue loss or partial operation suspension due to the COVID-19 pandemic may be eligible for the Employee Retention Tax Credit (ERTC). To find out if your business qualifies, review the criteria outlined by the Internal Revenue Service (IRS) below.
Businesses of any size that were operational and experiencing revenue loss in 2020 can apply for the ERTC. Limited liability companies (LLC)s, C-corporations, S-corporations and sole proprietors are all eligible for coverage. In addition, an employer is eligible for ERTC if:
- They had to partially or fully suspend operations due to a government order related to COVID-19 OR
- Experienced a significant decline in gross receipts during the qualified period from 2019 and 2020. Employers must show a decrease of at least 20% in quarterly gross receipts from 2019 gross receipts when calculating their tax credit amount.
In order to qualify for the Employee Retention Credit, employers must pay certain qualifying wages to their employees. Generally, qualifying wages are wages paid to employees for time worked in either 2020 or 2021 and may include cash compensation, tickets/vouchers/cards for food services or other items of value, sick leave and health care expenses for which a payroll tax credit is applicable. Qualifying wages vary depending on the employer’s business category, whether the employer was fully or partially suspended from operations due to a government order related to COVID-19 and whether the employer had a significant decline in gross receipts compared to other calendar quarters.
For employers with an average number of full-time employees in 2020 that is greater than 100, qualifying wages generally include up to $10,000 per employee paid in any taxable period between March 13th and December 31st of 2021; as well as up to $10,000 per employee paid in any taxable period between January 1st and December 31st of 2021 if applicable.
For employers with an average number of full-time employees in 2020 that is 100 or fewer, qualifying wages generally consist of all eligible costs incurred by the employer over each respective calendar quarter including:
- Payroll Costs
- Health Care Benefits
- Retirement Benefits
- State & Local Taxes Imposed Upon Wages
- Compensation Paid To A Sole Proprietor
- Gross Receipts Reductions Attributed To Changes Of Certain Business Operations Due To Orders Or Rules In Response To COVID-19
These costs are subject to certain other limitations based on various factors such as total amounts spent on all covered costs (both inside and outside of the United States), certain exclusions linked with adjusted gross income level calculations related to various Subchapter S entities and more.
Calculation of credit
When employers use the Employee Retention Tax Credit, they will be able to receive up to $5,000 in federal tax credits for each employee who either receives wages or whose wages are partially subsidized by the credit. The credit is available only when industries and businesses have been affected by COVID-19. To determine who is eligible for this credit, employers must consider factors such as total wages paid, revenue reduction, and applicable period of operation.
The calculations required to make the tax determination begin with their annual gross receipts. Employers should take their annual gross receipts from 2019 and compare it with their 2020 income receipts: if 2020 income was less than 80% of 2019 income, then employers are qualified for benefits from the Employee Retention Tax Credit program. It’s important to note that for larger businesses (with more than 500 employees), then the 80% threshold may vary based on industry sector.
After verifying eligibility, an employer’s next step is to calculate how much of the $5,000 credit can be claimed per employee. This calculation requires additional information including total gross wages paid in 2020 and payroll taxes due (federal income taxes withheld) during 2020 calculated under section 3111(a). If these requirements are met and you meet certain annual wage limits for your employees ($2 million aggregate wage limitation), then you will be able to claim a percentage of your eligible wage costs incurred during 2020 – up to a maximum of $5,000 per employee with no limit on total payroll costs taken into account.
Lastly, employers must also determine whether they have had a full or partial business shut down due to governmental orders related to COVID-19 between April 1st through December 31st of 2020 in order to benefit from full or partial relief amounts related to these payments made during the closure period. The amount of relief will depend upon several factors including length and scope of closure order issued by local agencies and amount/time periods over which payment were made during that time period – again depending upon how much was paid annually versus how much was paid while closed partially/fully due government orders related to COVID-19 in your area/region at that time period as well as certain other conditions as set out by IRS guidelines (for example health plans continued).
When Will I Receive My Credit?
The Employee Retention Tax Credit (ERTC) is a credit created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This is a refundable tax credit that is available to certain employers who keep workers on the payroll during the COVID-19 pandemic. The ERTC is available for eligible employers for wages paid between March 13, 2020 and December 31, 2020.
For those wondering when they might receive their ERTC, let’s take a look at the details:
Timing of credit
Businesses that qualify for the Employee Retention Tax Credit can begin to receive the credit after they pay their employees qualified wages. Eligible employers that choose to retain their employees and pay qualified wages may be eligible for an immediate refundable payroll tax credit of up to 50% of qualified wages paid from March 13, 2020 through December 31, 2020. Employers are eligible for a maximum credit of $5,000 for all calendar quarters and up to $10,000 in total over the entire year.
To receive this tax credit, employers must apply their eligible employee wages against their federal employer payroll taxes. Wages applied against the Employee Retention Tax Credit are not deductible for income tax purposes. Employers may carry back any remaining amounts to offset prior quarter liabilities or receive a refund when an employer files Form 941 quarterly return with the IRS.
The amount of the tax credit is based on what would otherwise be due in employment taxes and should be reported on Line 7 of Form 941 quarterly return with the use of Accounting Method C. The amount allowed as a refundable portion will be reduced by any related credits the employer has taken against employment taxes such as Work Opportunity Tax Credits (WOTC), Health Coverage Tax Credits (HCTC), or other credits associated with unemployment benefits including FUTA credits associated with states’ unemployment insurance programs. Furthermore, employers who have already received Payroll Protection Program loans need to reduce their ERTC amount by half of any amounts forgiven under PPP before claiming ERTC as such at Line 6c of Form 941 quarterly return.
How to claim the credit
Employers who are eligible for the Employee Retention Tax Credit can receive the funds in two ways. If a business has payroll taxes of less than $2 million in any given quarter, they are allowed to claim the full amount of the credit when submitted with their quarterly payroll tax filings. In contrast, businesses with payroll taxes larger than this will be paid on an established timeline by either a check or direct deposit.
Generally speaking, businesses who qualify for this credit and choose to receive a payment instead of having it factored into their quarterly tax filing should expect to receive payment 15 days after submitting an application. To receive these payments, businesses must complete Form 5132 which lets them elect to have the IRS provide a payment and identify the associated checking account details. Businesses need not wait until they pay their quarters taxes – they can submit the form at any time prior to the end of the quarter.
The application period for receiving funds associated with this tax credit runs from March 12 2020 through December 31 2020 and is limited to $5,000 per employee. Claims can be made for three different quarters – March 12-June 30th, July 1-September 30th and October 1-December 31st – but due to timing limitations claims cannot overlap between quarters or years. Finally, it is important to note that these payments are technically loans, so employers should make sure that they document appropriately so that they may eventually return what is not owed upon submitting final year end paperwork.
How to Maximize Your Credit
The Employee Retention Tax Credit (ERTC) is designed to help businesses that have been affected by the COVID-19 pandemic. Employers who qualify for the credit can get an up to $5,000 refundable tax credit for each qualified employee they retain during the tax year.
To maximize your credit, there are a few key things you should know about the program. This section will go over the various aspects of the program and how you can use it to maximize your credit:
One of the most effective ways to maximize your Employee Retention Tax Credits is to increase wages for the year. Raising wages is an ideal way to demonstrate that you are making investments in the employees who remain with you during challenging times. Additionally, increasing salaries might be necessary if some employees have suddenly become overworked as more people may need to fill a variety of roles due to layoffs and job reductions.
Salary increases should not be used as a one-time bonus but rather minimally incorporated into broader efforts around boosting employee engagement and team morale during difficult times:
- Invest in employee development and training.
- Offer flexible work options.
- Provide additional benefits and perks.
- Encourage collaboration and open communication.
- Create a culture of recognition and appreciation.
Increase number of employees
Hiring additional employees can be a great way to increase the size and reach of your business. More employees mean increased productivity, more opportunities to service more customers, reach more markets, and build out a larger client base. In addition, having multiple employees can provide additional financial benefits such as new purchase incentives and tax breaks.
However, hiring additional employees requires considerable planning and consideration. It’s important for employers to find the right fit for their businesses’ needs and carefully analyze the cost/benefit ratios of expanding staffing. Here are some steps you should take when evaluating potential new hires:
- Conduct research on potential new hire profiles
- Identify job roles that require increased human capital
- Develop a recruitment strategy that matches your company’s budget
- Develop a detailed job description outlining requirements and benefits
- Recruit qualified candidates online or through employment agencies
- Navigate all legal requirements as related to hiring decisions
- Invest in employee training programs as needed to ensure success
Consider other tax credits
In addition to the Employee Retention Tax Credit, there are a number of other available tax credits you can use to maximize your savings. The Earned Income Tax Credit (EITC) is a federal tax credit for working families with low incomes, and can be worth thousands of dollars. Families with three or more children may be eligible for even higher benefits. Additionally, some states offer additional credits when filing your taxes.
Other available credits include those for education expenses and those intended to help meet government requirements such as Clean Air and Clean Water Act credits. Even if these are not applicable in your case, they are worth exploring since they could lead to significant savings on taxes paid.
The best way to make sure that you’re taking advantage of all the tax savings opportunities available is to:
- Consult a qualified tax professional
- Use specialized software designed specifically for maximizing credit opportunities
Doing so will ensure that you don’t miss out on any of the essential benefits offered by the Internal Revenue Service (IRS).
The Employee Retention Tax Credit (ERTC) is a valuable financial benefit that many businesses are eligible for, but there are other considerations to be aware of before claiming it. For example, it’s important to ensure that you meet all of the eligibility requirements and that your business is able to accurately track and file the necessary paperwork. Additionally, you’ll need to consider how the credit affects your quarterly and annual tax filings.
In this section, we’ll go into more detail about these other considerations:
Payroll tax deferral
As part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), a payroll tax deferral is available for certain employers. This allows employers to defer the deposit or payment of the 6.2% employer portion of Social Security tax imposed on wages paid from March 27th 2020 through January 1st 2021.
Eligible employers must have fewer than 500 employees, which includes individuals employed on a full-time, part-time or other basis.
The deferred amount can be paid in two equal installments: 50% is due by December 31st 2021 and the remaining 50 percent is due by December 31st 2022; however, you may make arrangements with the IRS to split up these payments into installments over more than two years. Employers that opt to defer deposits and payments may not claim credits under the Employee Retention Credit concurrently with wages they are subject to payroll tax deferral relief.
Note that this payroll tax deferral only applies to Social Security Taxes; if an employer pays additional taxes such as Medicare Taxes or Federal Income Taxes withheld from employee wages, then those taxes are still due according to regular deposit schedules. Additionally, voluntary withholdings of employee Social Security for employees earning less than $4,000 during any biweekly period may occur but under no circumstances can an employer notify its employee that taxes will not be withheld absent an express written request from the employee in advance of such payment.
Other relief available
It is important to remember that certain other relief programs may be available when an employer chooses not to or cannot take advantage of the Employee Retention Tax Credit. This includes loan forgiveness and other government loan programs, memberships in the Pandemic Unemployment Assistance Program, access to the SBA Paycheck Protection Program, and the Families First Coronavirus Act.
Additionally, employers should consider how tax credits for short-term disability insurance premiums paid by employees can help minimize their financial impact. Some employers may also be eligible for tax incentives such as the Work Opportunity Tax Credit, the Economic Injury Disaster Loan Support Programs and possibly even new taxes that target specific industries or businesses.
Finally, employers should keep an eye out for any potential employment law changes or pandemic response measures so they can take advantage of any administrative or financial relief offered through these programs in addition to relief through the Employee Retention Tax Credit.
Businesses and organizations that claim the Employee Retention Tax Credit (ERTC) must keep detailed records in support of their claims. Individuals and employers must be able to demonstrate that they meet all ERTC requirements, including maintaining payroll statements, tax returns, and other documents as evidence of their compliance. Employers should also prepare a written description of calculations used to determine the amount of the employee retention credit, including any requests for guidance from the IRS.
The main recordkeeping requirements are as follows:
- Verification from financial institutions that payments were made to workers – This can include payroll processor statements or bank statements which would provide proof funds were received for employment-related expenses;
- Copy of employee’s Form W-2 and applicable Forms 1099 – These documents show employees’ wages and verify social security numbers;
- Payroll tax filings (Form 941) – They provide verification that an employer has paid required taxes on behalf of its employees;
- Documentation showing total number of full or part time employees on payroll during both qualified quarters (Forms W-3) – This document serves as a summary schedule listing all employees on payroll throughout the entire period claimed;
- Any other documentation specified by law – This can include documentation related to group health care coverage costs, contributions to SIMPLE IRAs or other tax exempt accounts.