The Employee Retention Credit (ERC) is a component of the Coronavirus Aid, Relief and Economic Security (CARES) Act that provides employers with relief from certain payroll taxes in order to encourage them to keep employees on their payrolls. The credit is available to employers who have experienced a dramatic drop in their business due to the COVID-19 pandemic.
In this article, we will give an overview of the ERC, explain when and where to report the credit on your tax return, and provide a few key tips to help you get the most out of the credit:
- Overview of the ERC
- When and where to report the credit on your tax return
- Key tips to help you get the most out of the credit
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act designed to financially help employers keep and retain their employees. Its main purpose is to encourage businesses to keep their employees on payroll even if their operations were affected by the economic downturn due to COVID-19. Generally, eligible employers can claim fifty percent of the qualified wages they paid up until December 31, 2020.
Generally, companies with less than 500 full-time equivalent employees are eligible for this credit covering wages paid between March 13, 2020 and December 31, 2020. The amount that an employer can claim varies based on wage type; they may qualify for a credit up to $5,000 per employee over the entire period or $10,000 per employee if wages included both health insurance expenses and qualified wages paid for leave taken for reasons related to COVID-19. The maximum amount of ERC allowed is $5K multiplied by number of employees during each calendar quarter or half the total number of FTEs (full time equivalent) from each applicable quarter in 2020 if it’s greater than the first calculation.
This credit may be claimed as a refundable payroll tax credit on IRS Form 941 or in some cases can also be claimed as a credit against estimated taxes on Form 1040-ES during certain points in time depending on when qualified wages are made and also when filing deadlines apply. There are certain eligibility requirements such as meeting a combination of employee count reduction percentages and gross receipts depreciation that need to be met in order for an employer to qualify for this credit so it’s important to understand these requirements before claiming them on any tax form.
Who is eligible for the Employee Retention Credit?
The Employee Retention Credit (ERC) is available for employers that have experienced financial hardship due to the COVID-19 pandemic and as a result, have either partially or completely suspended their business operations during the 2020 calendar year. This includes employers who are subject to shutdown or “shelter-in-place” orders from relevant governmental authorities due to COVID-19. The maximum credit available for any eligible employer is $5,000 per employee.
The ERC applies to all businesses regardless of size and type including C corporations, S corporations, partnerships and non-profits that employ employees physically located in the United States. Sole proprietorships and independent contractors are not eligible for the ERC. Additionally, government entities such as federal, state and local, Indian tribes are excluded from the Employee Retention Credit program.
Employers may be qualified if they experience:
- A significant decline in gross receipts in comparison to the corresponding calendar quarter of 2019
- Have been forced to fully or partially suspend operations due to governmental orders related to COVID-19
- Are suffering from losses due to shortages of labor or materials detected on or after March 13, 2020 and before January 1, 2021.
Qualifying employers may also be able to receive advance payments of the tax credit which can help with their cash flow needs.
Tax Return Preparation
If you are an eligible employer in the United States, you may be able to take advantage of the Employee Retention Credit (ERC). This credit is part of the CARES Act, and it can provide financial relief for businesses affected by the coronavirus pandemic.
Before you can file your tax return, you need to know where to include the Employee Retention Credit. This article will discuss the process of preparing your tax return and where to list the Employee Retention Credit.
How to claim the Employee Retention Credit
The Employee Retention Credit is a refundable tax credit available to eligible employers when they retain their employees, as established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This credit is designed to help keep businesses afloat during the coronavirus pandemic. To be eligible for this credit, an employer must have been in operation on February 15th, 2020 as well as have either fully or partially suspended operations due to government-issued orders or have a significant decline in gross receipts.
The amount of credit varies based on the number of employees retained and wages paid by the employer. The maximum amount that can be claimed is $5,000 per employee over the course of 2021 (January to December). Here are the steps for claiming the Employee Retention Credit:
- Calculate your eligible employee count and estimated wages for 2021
- Record your expenses and Gross Receipts throughout 2021
- Submit IRS Form 941, Employer’s Quarterly Federal Tax Return
- Submit IRS Form 7200 at year’s end to request advance payment from Treasury
- Include all required information and forms when preparing 2020 return
- Claim credits on Form 941 or Schedule F filed with final 2020 return
Following these steps should help employers determine eligibility and apply for their recovery rebates accordingly. Businesses should confirm with an accountant to ensure they are taking full advantage of all available credits when filing their tax return each year.
Where to enter the Employee Retention Credit
The Employee Retention Credit (ERC) is a federal incentive aimed at providing employers with a credit against Social Security taxes for wages paid between March 12, 2020 and December 31, 2020. The ERC is intended to assist employers in keeping employees on their payrolls during the coronavirus (COVID-19) pandemic.
The Internal Revenue Service’s Form 941 must be filed to receive the tax credit – but where does the credit go?
On Line 11b of Form 941, employers are asked to report any refundable credits they are eligible for on wages paid during that particular quarter. The Employee Retention Tax Credit should be reported in this section as “Retention Cr” and applied against your Social Security tax liability on line 5 of Form 941.
It is important to note that if you are eligible for any type of wage credits such as the Paid Sick Leave or Family Leave credits, they should NOT be included here. All wage tax credits should be entered separately on Lines 12A through 12E of your Form 941. Any excess credits can either be:
- Carried forward to future quarters until fully utilized; or
- Refunded from the IRS upon filing in most circumstances.
How to calculate the Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable federal income tax credit for employers equal to 50% of qualified wages paid during the COVID-19 period. This credit was implemented as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act to help businesses with the financial hardships brought on by the pandemic. Calculating and claiming the ERC can diffcult, so it is important to understand how to properly calculate it in order to protect your business from an audit in the future.
The first step for calculating your ERC is figuring out your baseline wages paid in 2019 or 2020 before COVID-19 struck. This can be calculated using Form 941 and Form 940 from those years. You will then compare those baseline wages against any qualified wages earned during the taxable period between March 12th and Dec 31st of 2020 that have not been used as WOTC or Work Opportunity Tax Credits.
You will then use either form 941 or 943 (depending on which one you filed in 2019 or 2020) to determine how much of your qualified wage expenses are eligible for the ERC during this period. Add any preexisting credits like “Closed Computer” credits that were claimed prior to 2021 but had not yet been applied and reduce it by any refundable payroll taxes taken during this timeframe like advance Earned Income Credit payments or deposits made towards refundable credits like FICA tax deductions as well as estimated taxes already claimed through previous years’ returns.
Once you have determined all three components discussed above, you will subtract your baseline amounts from your eligible wages determined in Step 4 above and enter that figure into line 11a on Form 941 or line 20a on Form 9423 if you filed form 9423 instead last year since that form does not have a line 11a equivalent entry point for ERC credits. Before filing, make sure to double check all of your calculations!
When filing your taxes, understanding exactly where an Employee Retention Credit (ERC) should be placed can be difficult. To ensure that your filing is accurate, you should use additional resources. These resources can help provide useful information and guidance to make sure you are filing correctly.
In this section, we will discuss some of the best resources available to assist you with understanding the Employee Retention Credit:
- Resource 1
- Resource 2
- Resource 3
- Resource 4
IRS Publication 535
The Internal Revenue Service (IRS) provides comprehensive information on appropriate business expenses and deductions in Publication 535. This publication covers topics such as employee costs, depreciation of assets and expense allowance deductions. It also provides detailed instructions on where to report qualified business expenses, including the Employee Retention Credit (ERC).
Publication 535 thoroughly explains the purpose of ERCs and how they may be applied to Employee Benefit Plans (EBPs). It outlines the procedure for claiming an ERC deduction, which entails filing Form 941, along with any supporting documentation required by the IRS. In addition, Publication 535 also outlines various other contributions to employees that can be claimed as deductions. These include education benefits and contributions made to health plans or retirement plans. Finally, it provides information regarding the deductibility of qualified transportation and commuter expense fringe benefits provided by employers for their employees.
Knowing which documents are needed to claim deductions for employee benefit plans is important for employers in order to maximize their tax savings. With the complete guidance provided through IRS Publication 535, companies can easily navigate the rules around claiming employee retention credits on their tax return.
IRS Form 941
After determining that you are eligible to participate in the Employee Retention Credit, and completing your calculation to determine the amount you can claim, you need to report it on IRS Form 941.
Form 941 is used to report income taxes withheld from employees and both the employer’s and employee’s share of FICA taxes for each quarter.
On line 11g of Form 941, employers enter the total refundable portion of ERC due as a result of employment payroll taxes already reported on lines 7 (social security tax) and 8 (Medicare tax). Note that if you have employment tax deposits that exceed your liability as a result of claiming ERC credit, then this amount is also reported on line 11g.
Additionally, employers participating in the program must indicate their participation by either checking box 12a or 12b on this form. Be sure to read any instructions included with Form 941 before submitting it to ensure all information needed is included in the form.
If you are an employee who has received a portion of ERC due to an employer participating in this program, then there is no action for you to take related directly to IRS Form 941. Your former or current employer will handle all filings related to this credit; however, specific details related how much was credited may show up on IRS Forms W-2 and 1099-G. See our page dedicated just for clarification about employee actions regarding the Employer Retention Credit for more information about these forms and what information they may contain related to the credit.
IRS Form 940
Employers are required to complete IRS Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, on an annual basis in order to report any wages paid out during the year and the associated FUTA tax due. Additionally, Form 940 also requires employers to report any wages received under the Employee Retention Credit, available under Public Law 116-136.
The Employee Retention Credit is reported on line 7 of Form 940 and can be claimed by eligible employers who pay qualified wages or provide health coverage. The amount of the credit is limited to 50% of qualified wages plus health plan expenses incurred by the employer up to a total of $5,000 per employee during the 2020 calendar year.
By completing Form 940 accurately, employers will ensure that they are meeting their filing requirements under federal law. If you need more information about how to complete this form, please consult a tax professional or refer to IRS Publication 15 (Circular E), Employer’s Tax Guide for additional guidance.