Overview of Employee Retention Credit
The Employee Retention Credit is a tax credit available to certain businesses and nonprofits that have experienced a decrease in revenue due to the COVID-19 pandemic. The credit is designed to help businesses and organizations keep employees on their payroll and can be claimed on a quarterly basis.
In this article, we’ll provide an overview of the Employee Retention Credit, including:
- Who is eligible
- How to apply
- And more
Definition of Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable credit available to employers in 2020 and 2021. This tax credit helps employers who have been financially affected by the COVID-19 pandemic due to partial or full shutdowns, significant revenue losses, or other impacts.
The ERC is a fully refundable payroll tax credit for employers subject to employment taxes and is based on qualified wages paid after March 12, 2020 and before January 1, 2021. The amount of the ERC can be equal to 50 percent of up to $10,000 in total wages paid per employee from March 12, 2020 through December 31, 2020. This maximum could be as much as $5,000 per employee husbanded over the entire period.
The amount that taxpayers qualify for depends on several factors:
- Whether the employer opted into the program;
- If a full or partial business shutdown was required by government order;
- If they are reducing operations due to insufficient customer demand; or
- If ordinary gross receipts declined at least 20 percent during any calendar quarter of 2020 compared to the same quarter in 2019.
To calculate their eligible credits, taxpayers should include costs from qualified health plan expenses paid with respect to certain wages taken into account for the credit and expenses incurred for certain exiting employees’ payments under COBRA continuation coverage elections with respect to those wages. In addition, taxpayers should take into account other employees’ benefits such as vacation pay and holiday pay when calculating their credits.
The Employee Retention Credit is a refundable tax credit, administered by the Internal Revenue Service (IRS) to encourage employers to keep employees on their payroll during the COVID-19 crisis. To qualify, a business must have seen its gross receipts decline by more than 50 percent compared to the same quarter in the prior year. Additionally, businesses applying for Paycheck Protection Program loans are not eligible for this tax credit.
Eligible employers may claim up to 50 percent of qualified wages for employees earning less than $4,000 in any given quarter. To be eligible for the full credit, an employer must pay qualifying wages to either an employed worker or a laid-off worker who has been rehired before December 31 of 2020. Employers must maintain records regarding where and how they used the credit funds.
Eligible employers should also be aware that fringe benefits such as vacation pay, health care paid directly by the employer, and other separately stated payments do not count towards qualified wages, meaning employers will receive a reduced credits when these benefits exceed 45 percent of total qualified wages paid by the business during that calendar quarter.
Claiming the Employee Retention Credit
Businesses that have been affected by the Covid-19 pandemic may be eligible for the Employee Retention Credit (ERC). The ERC is a refundable tax credit that can help businesses cover wages they pay their employees. If your business is eligible, you can claim the ERC by filing a claim with the IRS.
In this article, we will discuss how to go about claiming the Employee Retention Credit:
How to Claim the Credit
To claim the Employee Retention Credit, businesses must complete Form 941, Employer’s Quarterly Federal Tax Return. As part of the filing process, employers must enter the credit amount on Line 12b of the form and enter “ERC” in the field next to it. Any additional information about claiming or certifying for the credit will be indicated in this line.
Additionally, to take advantage of the employee retention credit, employers must also complete Form 5884-C and attach it to their quarterly tax return. This form requires information such as a description of how your business qualifies for the credit, how many full-time employees work there and how much you expect to spend on wages during each quarter. It also includes a worksheet employers can use to determine how much they can potentially claim with this tax credit. After submitting these forms with their quarterly tax returns, employers will eventually receive an approval notice confirming eligibility for the tax credit and that their taxes have been updated accordingly.
Where to Claim the Credit
To claim the Employee Retention Credit (ERC), employers must use Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund and related instructions. When filing Form 941X, employers should complete IRS Schedule A, Employees Retention Credit. In addition to information requested on Form 941-X, Schedule A requires employers to provide a computation of the amount of the credit they are claiming by filling out line 2 (qualifying wages) and line 4 (lowered wages).
The instructions provided with Form 941-X specify how to calculate each of these components and offer further guidance on how to claim the credit. Employers may amend previously filed Forms 941 for applicable quarters to claim this credit where they did not originally do so.
Employers should make sure they are complying with the criteria discussed above to be eligible for this important form of relief. These criteria differ depending on employer size and aggregate payroll costs in 2020. For additional information and more specific guidelines consult Publication 5146 from the IRS or seek guidance from a qualified professional tax specialist.
How to Calculate the Credit
The Employee Retention Credit is a refundable tax credit for certain eligible employers. Employers can claim the credit if their operations are fully or partially suspended during a calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19.
Calculating the Employee Retention Credit is relatively simple. According to the IRS, eligible employers can claim a credit against their payroll taxes equal to 50% of qualified wages they pay to employees after March 12 and before Jan. 1, 2021. The maximum wage that may be taken into account for each employee for all calendar quarters is $10,000 resulting in the maximum credit per employee per quarter being $5,000 ($10,000 multiplied by 0.50). Qualified wages generally include all wages up to that amount but not more than $10,000 for all of 2020 paid before Jan 1., 2021. There is no limit on the number of employees for whom you can take this credit for any quarter as long as you meet other eligibility requirements.
Eligible employers will calculate the total qualified wages considered when claiming each quarter’s credit on Form 941 and enter it on line 12a (and 12b when applicable). They must also subtract qualified health plan expenses allocable the employer’s portion of Medicare Tax from that total before calculating the credit in Part V Section L of Form 941 Employer’s Quarterly Federal Tax Return. Employers will then enter their calculated credits on Section H Part 2 line H2b of Form 941 if claiming only related to excess Social Security or railroad retirement (RRTA) tax deposits made and line H2c if claiming solely related to excess Medicare tax deposits made in addition entering any additional federal income tax withholdings associated with section 3111(e) tips reported by tipped employees during calendar quarters before Dec 31., 2020 Finally these credits should be carried back first; then any remaining balance may be carried forward through 2023 as an overpayment applied in computing subsequent taxable quarters’ liabilities until completely taken into account using Part IV Line 27 overpayment worksheet and entering applicable amount from lines 18-27 on Form 1040 Schedule 6 Additional Taxes .
Resources for Employee Retention Credit
The Employee Retention Credit created by the CARES Act is a valuable incentive for businesses to retain employees during the pandemic. To maximize your use of the credit, it’s important to understand the resources available to help you claim the credit.
This section will explore the different resources available to help you claim the Employee Retention Credit:
The Internal Revenue Service (IRS) website has comprehensive information on the Employee Retention Credit. This includes the documents needed to take advantage of the credit. Employees may use IRS Form 5884-C and related instructions to claim the Employee Retention Credit on their federal income tax return. To find out more about this credit, individuals should consult their tax advisor or visit the IRS Website for more information.
The IRS website also provides resources for employers interested in taking advantage of this tax credit, including instructions on filling out Form 941, Employer’s Quarterly Hospital Insurance Tax Return; Publication 15-T, Federal Income Tax Withholding Methods; and an extensive library of FAQs related to employee retention credits and payroll taxes. The website also offers links to other online resources to make taking advantage of the Employee Retention Credit easier, including a withholding calculator and a locator service that allows employers to find local help with their payroll taxes.
In addition to the IRS website, there are many other resources available to help businesses understand and navigate the rules regarding claiming the Employee Retention Credit. Maintaining employee satisfaction and retention can be challenging, but with these additional tools, businesses can find the answers they need:
- The U.S. Department of Labor – This department provides a number of resources for employers related to understanding the credit, compliance requirements and strategies for best practices in employee retention.
- The National Foundation of Taxpayers Advocating for Taxpayers – This organization is a great resource for individuals and small businesses looking for comprehensive guidance on tax information, research and advice on how to claim the Employee Retention Credit.
- American Institute of Certified Public Accountants – CPA firms are invaluable resources when it comes to finding information on various tax laws and credits available to businesses. The AICPA provides guidance around successfully claiming the ERC which can be helpful when determining what qualifies as qualified wages or wages paid before June 30th.
- Entrepreneur – Another great resource is Entrepreneur, which has an array of articles focused on helping companies effectively manage their payroll costs while claiming any credits that may be available such as the Employee Retention Credit. You’ll find advice from business leaders in different industries who have successfully tackled payroll tax issues while maximizing their deductions under this program.
In conclusion, the Employee Retention Credit is an incentive made available to employers who retain or continue to pay wages to their employees during the COVID-19 pandemic. It is an attractive credit in that it can be taken in addition to other credits, such as the Paycheck Protection Program, against the employer’s Social Security taxes.
Now that you know the basics, let’s dive into the details of where to go to claim the Employee Retention Credit:
Summary of Employee Retention Credit
The Employee Retention Credit is a welcome addition to the job market and provides financial support to employers seeking to retain their employees. Employers may be eligible for a credit against their Social Security payroll taxes equal to 50% of qualified wages paid up to $10,000 in wages per employee. All businesses (except those listed in the IRS fact sheet) that operate a trade or business and have experienced either full or partial suspensions of operations due to federal COVID-19 mandates, or have seen a significant decline in receipts may be eligible for the credit.
Qualifying wages are capped at $10,000 per employee on an annual basis. This means that employers can receive credit for up to $5,000 per employee for qualified wages paid between January 1, 2020 and December 31, 2020. To apply for the credit, employers must submit Form 941 with an IRS-issued IRPV form each quarter along with applicable documentation verifying their eligibility. Employers then can claim the Employee Retention Credit when they file their 2020 Form 941 during 2021 filing season.
The Employee Retention Credit is just one element of the larger CARES Act package which provides much needed relief to employers and employees alike during this difficult time. Make sure you consult with your accountant or other trusted tax advisor regarding how best to claim this important credit so you can maximize your benefits as an employer.