Overview of Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a new tax credit for businesses and organizations to help retain or bring back employees during the Covid-19 pandemic. This credit can provide a much-needed boost to those businesses that were adversely affected by the pandemic and subsequent economic fallout.
This section will provide an overview of the ERTC, explaining who is eligible, how to claim the credit, and more:
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a temporary incentive program created under the CARES Act in response to the COVID-19 pandemic. It provides refundable tax credits against certain employment tax liabilities, including federal income tax withholding, Social Security and Medicare taxes, to eligible employers who have been affected by the economic crisis resulting from the COVID-19 pandemic. The ERTC is designed to encourage employer’s immediate reinvestment in their workforce and support businesses that have been financially hurt as a result of reduced operations or significant declines in gross receipts.
To be eligible for the ERTC, an employer must meet all of the following criteria:
- The employer experienced either full or partial shutdown due to government orders due to COVID-19; or
- The employer experienced a significant decline in gross receipts during a calendar quarter relative to 2019 quarterly gross receipts; or
- If applicable, they had more than 100 full time employees in 2019.
Once qualified, employers can receive credits equal to 50 percent of up to $10,000 in wages (including health plan expenses) paid per employee per quarter during 2020 and 2021. For 2021 only, businesses with 500 or fewer employees are eligible for enhanced credits equal to 70 percent of up to $10,000 per employee per quarter beginning January 1st. If an employer’s weekly wages during the CARES Act period exceed their average weekly wages paid from 2019 through March 13th 2020 then additional credit will apply up too $10K divided by 26 weeks. This credit is currently available through June 30th 2021 and is retroactive back to January 1st 2020.
Who qualifies for the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) was created in the Coronavirus Aid, Relief, and Economic Security (CARES) Act as a tool for businesses to help employees that have been adversely affected by the COVID-19 pandemic. The ERTC is a refundable tax credit for employers who retained their employees during the period beginning on March 12, 2020 and ending on December 31, 2020. To qualify for this tax credit, businesses must meet certain criteria:
- The business must be an eligible employer that has obtained Qualified Wages or Qualified Paid Sick Leave from March 12, 2020 through December 31, 2020. Eligible employers are either an eligible organization exempt from taxation including charitable organizations and governmental entities OR businesses that were fully or partially suspended due to a governmental order related to COVID-19 during the applicable period OR experienced a significant decline in gross receipts (>50%).
- Qualified wages paid to employees per quarter which cannot exceed $10,000 total wages including healthcare costs per employee while they are employed over any consecutive three-month period in 2020; OR employed and paid qualified paid sick leave wages where qualified sick leave wages subject of special rules cannot exceed $5,110 total per employee annually in 2020.
- Employees must be consistently employed for an average of 15 hours or more each week during the applicable period starting with their first day of hire through December 31st, 2020; OR receive paid sick leave wages during single taxable quarter that begin after March 12th and ending before January 1st 2021.
- Businesses seeking ERTC need to prepare forms 941 quarterly return filing process line 10 which requires employers to track total credits along with line 18 reporting total credits claimed for each quarter prior to filing 941 – Employer’s Quarterly Federal Tax Return Form as required process pursuant with IRS taxation law requirements upon filing; AND comply with all other related IRS regulations such as computation of Employment Credit Refunds allowing applications not only once but repeatedly if return filed under nontaxable periods when all requirements met such as those who use accrual basis accounting method while seeking full federal employment credit refunds processing compliantly with relevant Treasury rules & regulations including reduced payroll tax deposits if permissible under Internal Revenue Code Titles 26 & 29 for exemptions among other compliance details depending on specific case scenarios upon electronic filing process securely online via eFiling portals like FastTax Refunds website.
How to Claim the Employee Retention Tax Credit
The employee retention tax credit (ERTC) is a major part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed in 2020. It provides businesses with an incentive to retain employees, even in difficult times. This tax credit is available to businesses that have suffered a significant decline in gross receipts due to the Coronavirus pandemic.
In this article, we will discuss how to claim the ERTC and the eligibility requirements:
What forms do I need to claim the Employee Retention Tax Credit?
Claiming the Employee Retention Tax Credit (ERTC) requires completing several forms, depending on the size and type of business. Eligible businesses will need to complete IRS Form 941, Employer’s Quarterly Federal Tax Return and Form 7200, Advance Payment of Employer Credits Due To COVID-19 for each quarter in which the credit is available.
For self-employed individuals or single-member limited liability companies that don’t close their books at the end of each quarter and instead use a fiscal year filing requirement, they would file IRS Form 945Annual Return of Withheld Federal Income Tax.
In addition to these forms, employers must also attach a written statement to each quarterly return claiming the ERTC. This additional information must document how they are relying upon the rules defined by Congress or explain how they meet all other criteria for claiming the credit.
Finally, employers will need to attach copies of all Forms W-2 that report wages paid in connection with work performed during each calendar quarter for which an employer credits are being claimed via IRS Form 941 or Form 945. For more details on what information is needed when filing these forms and claiming the credit, employers should refer to IRS Publication 5207: Employee Retention Credit Available under The CARES Act.
What documents do I need to claim the Employee Retention Tax Credit?
When claiming the Employee Retention Tax Credit (ERTC), employers must provide documentation that demonstrates they have been affected by the COVID-19 pandemic. This includes, but is not limited to:
- Evidence of qualifying wages paid to employees
- Internal documents that demonstrate a significant decline in gross receipts
- Forms used to claim wage credits
- Copy of amended returns or extensions filed with IRS
- Invoices and receipts for qualified expenses claimed as wage credits
- Proof of credit calculations and amounts claimed for qualified expenses
It’s important to keep all documentation related to the credit in an organized file in case the IRS requests additional information when reviewing your claim. Employers should also be prepared to provide backup documentation such as copies of financial statements or payroll tax returns.
How do I calculate the amount of the Employee Retention Tax Credit?
The Employee Retention Tax Credit is a refundable tax credit available to employers that have been affected by the COVID-19 pandemic. The credit is equal to 50 percent of qualified wages paid from March 13, 2020 through December 31, 2020 up to a maximum of $5,000 per employee.
Qualified wages are those paid to an employee for services during either:
- A period during which the employer’s business operations were fully or partially suspended due to orders from an appropriate governmental authority; or
- A quarter (Q2 through Q4) in which the employer has experienced a “significant decline in gross receipts” relative to the same quarter in 2019.
To calculate the amount of the Employee Retention Tax Credit, you will need to determine your total qualified wages and eligible employees. Qualified wages include all payments made by employers for services performed by employees (such as current pay, back pay, and bonuses or awards); but do not include vacation/PTO payments made by employers or elective deferrals under a retirement plan. Eligible employees are those who are employed on any day within a calendar quarter—including full-time and part-time employees—that works 30 hours or more in each week of that quarter when an individual’s employment is not suspended due to business closure or lack of work within that quarter.
Once you have identified all eligible employees and qualified wages paid, you may calculate your credit amount using Worksheet 1 provided by The Internal Revenue Service (IRS). This worksheet can be found in IRS Notice 2020-22 and provides step-by-step instructions on how to properly calculate your Employee Retention Tax Credit. Remember that you must use this worksheet when filing for this credit with your quarterly tax return.
Benefits of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) provides businesses with a long-term tax credit to help with costs associated with retaining employees on payroll during the COVID-19 pandemic. The ERTC was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and is available to businesses of all sizes.
This section will cover the details of the ERTC, the eligibility requirements to qualify for the credit, as well as the benefits associated with receiving the credit:
- Details of the ERTC
- Eligibility requirements to qualify for the credit
- Benefits associated with receiving the credit
What are the benefits of the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) was implemented by Congress and signed into law as a result of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). This tax credit is designed to help employers retain their workforce during the COVID-19 crisis.
The Employee Retention Tax Credit (ERTX) offers employers a credit of up to $5,000 in wages paid per employee in 2020. The credit is worth up to 50% of qualified wages paid to each employee, up to the maximum per employee limit of $5,000. Qualified wages include employees’ salaries or wages that they receive between March 13 and December 31, 2020. For employees who are members of a group health plan or other benefits plan sponsored by the employer, qualified wages may also include amounts spent on eligible health plans during any period of leave taken under the Family Medical Leave Act (FMLA), such as paying for dependent care coverage for this period of leave.
This tax credit is especially beneficial for businesses that were forced to fully or partially close due to government restrictions or experienced significant revenue loss in 2020. Employers may claim an ERTC if their operations have been fully or partially suspended due to governmental orders related to COVID-19 during any calendar quarter in 2020 or they’ve experienced a significant decline in gross receipts year-over-year.
In addition to providing businesses with much needed financial relief, the ERTC can also encourage employers to keep their employees working by allowing them access additional funds from the government when business slows down significantly due more restrictive governmental orders that cause revenue declines. By helping maintain employment levels during difficult times and providing relief for eligible expenses related to benefit plans available through employers like health insurance coverage for furloughed workers, this tax credit has proven itself as invaluable resource for businesses attempting stay afloat during uncertain times.
How will the Employee Retention Tax Credit affect my business?
The Employee Retention Tax Credit (ERTC) is a payroll tax credit, with certain changes due to the coronavirus pandemic. It was initially introduced in the Coronavirus Aid, Relief, and Economic Security Act (or CARES Act), with the primary purpose of incentivizing businesses to keep employees on their payrolls, even when revenue and customer demand have dropped significantly due to COVID-19.
In essence, employers that take advantage of this credit can receive a refundable payroll tax credit of 100 percent for 50 percent of employee wages for up to $10K/month per employee. That means that companies may be able to get up to $5K back in refunds for each covered employee every quarter. The employer must provide documentation on wages paid from March 15th, 2020 – March 15th 2021.
More specifically, here are some benefits related to taking advantage of the Employee Retention Tax Credit:
- Lower financial pressure: By reducing your payroll expenses and cash flow strain, you will be able to more easily keep employees on staff during tough times.
- Increased incentives: Highlighting available credits could help attract and retain workers who are considering other offers or are uncertain about current positions.
- Improved cash flow: If a business qualifies for ERTC, they may be able to see an influx of money faster than from other assistance programs such as PPP loans because funds can be accessed quicker as part of their periodic deposit of payroll taxes. A business can actually receive this security deposit from the IRS as early as one month after filing Form 941 quarterly report claiming ERTC eligibility.
If you’re looking for more information or resources on the Employee Retention Tax Credit, you’ve come to the right place. This section will provide a comprehensive list of resources to help you understand how this tax credit works, how it applies to you, how you can access the credits, and any other resources you may find helpful. Let’s take a closer look at the resources available:
- Information on how the tax credit works
- How it applies to you
- How you can access the credits
- Any other helpful resources
Where can I find more information about the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is designed to provide financial relief to businesses affected by the coronavirus pandemic. The ERTC is a refundable credit against certain employment taxes equal to 50% of up to $10,000 in qualified wages each employee receives in 2020 and 2021, up to $5,000 total.
If you are seeking additional information on the ERTC, the following resources may be of assistance:
- The IRS website provides general information on the tax relief available through the ERTC and details on how employers can claim it.
- The US Department of Labor offers an overview of some federal aid programs that may be available to employers affected by Covid-19.
- The National Federation of Independent Business guides business owners through important employment law considerations for staff retention as part of their coronavirus toolkit for businesses.
- The Small Business Administration provides guidance on payroll tax credits related to coronavirus in response to questions about how employers can manage employer payroll taxes during this unprecedented time period.
- Small business owners can also consult with their tax advisors or accounting professionals for help understanding how eligible wages are calculated and how they will impact their tax filings that occur throughout 2021 and beyond.
Are there any other resources available to help me understand the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit that may help employers keep employees on their payroll during the COVID-19 Crisis. This credit applies to wages paid after March 12, 2020, and before January 1, 2021.
In addition to the IRS website and IRS FAQ page on the ERTC, there are other great resources available to help employers understand how to access this short-term relief:
- Webinars, webcasts and podcasts can provide helpful guidance on the ERTC from authoritative sources. The U.S Chamber of Commerce hosts frequent webinars addressing the latest guidance developments from the IRS regarding ERTC as well as other employment related tax credits. There are also a variety of podcasts available from professionals in the accounting or tax preparation fields that provide comprehensive explanations of how employers qualify for and can claim the ERTC credit.
- The National Small Business Association (NSBA) is also an excellent resource for information about the ERTC as well as other government assistance programs during COVID-19. The NSBA offers webinars tailored specifically to small business owners who may have questions related their unique circumstances and requirements under various assistance programs such as the Paycheck Protection Program (PPP).
Finally landowners should consider consulting with a qualified advisor such as a Certified Public Accountant or Enrolled Agent prior to filing any ERTC claims with the IRS in order to maximize their potential benefit while ensuring they comply with applicable laws, regulations, and applicable document requirements when claiming credits.