Overview of Employee Retention Tax Credit
Under the CARES act, employers qualify for the Employee Retention Tax Credit which offers up to $5,000 per employee. The credit is designed to help employers keep employees on their payroll during the COVID-19 pandemic.
This section will provide an overview of the credit, explain eligibility requirements, and provide information about where and how to apply for the credit:
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a federal tax credit that reimburses businesses for certain qualified wages paid to employees during the COVID-19 pandemic. This credit allows business owners to recoup large portions of the salary they pay their employees by claiming a refundable tax credit on their employee wages of up to $10,000 per employee, per year. The ERTC was created to help businesses retain and continue employing or rehire staff, while also incentivizing them to invest in employee benefits during this pandemic.
Businesses can utilize the Employee Retention Tax Credit if they have experienced any one of the following:
- A reduction in gross receipts by more than 50% compared to same period in 2019
- Mandated closure due to current health crisis guidelines
- Suspension of operations due to lack of resources (e.g. personal protective equipment for essential personnel)
The tax credits are applied dollar for dollar against an employer’s income tax liability, up to a cap of $5,000 per employee each quarter and $10,000 ($5,000 each quarter) for all quarters combined. Unused credits may be carried back – no earlier than six months prior – or forward 20 years. Any funds received as part of this program do not count as taxable income, including funds received from forgiven loans under PPP and other programs.
Who is eligible for the credit?
Under the Employee Retention Tax Credit (ERTC), employers that have experienced a full or partial suspension of operations because of COVID-19 qualify for a refundable tax credit. Also, employers that remain open but saw their gross receipts decline by more than 50% compared to the same quarter in the prior year also qualify for the credit.
Qualified businesses include companies across all industries, whether or not they take part in government relief programs such as the Paycheck Protection Program (PPP). Sole proprietors and independent contractors are also eligible for ERTC, as long as they file Form 1040 Income Tax Returns and have experienced a suspension of operations due to COVID-19.
In addition, qualified tax-exempt organizations also can apply for ERTC. These include:
- Charitable organizations exempt from taxation under Section 501(c)(3) of the Internal Revenue Code
- Social welfare organization under Section 501(c)(4)
- Veterans’ organizations under Section 501(c)(19)
How to Apply for the Credit
The Employee Retention Tax Credit is a tax credit that employers can take advantage of to help retain and keep their employees on payroll during the COVID-19 pandemic. The credit also applies if you need to partially or fully suspend your operations as a result of governmental or health department orders.
In this article, we will provide guidance on how you can apply for the credit:
Gather the necessary documents
In order to apply for the Employee Retention Tax Credit (ERTC) program, employers must first gather several documents. Various documents are required depending on the type of business entity an employer has – such as an LLC, corporation or sole proprietorship.
The standard forms and documents that employers will need to prepare include:
- Business Entity Legal Documents: Articles of Incorporation or Articles of Organization, Certificates of Good Standing, etc.
- Governing Body Information: Resolutions/Certificates evidencing authorization of person to act on behalf of the business and identifying the extent of their authority.
- 2018 and 2019 Quarterly Financial Summary Reports and other financial records.
- Tax Identification Records: EIN/TIN Employer Identification Numbers.
- Payroll Tax Returns (form 941).
- Payroll Statements from 2018 and 2019 (W2 Forms from employees).
- Other pertinent documentation as requested by IRS or state governing body.
With all necessary documents gathered, employers should then proceed to submitting the application for Employee Retention Tax Credit Program consideration.
Submit your application
If you meet the criteria for the Employee Retention Tax Credit, you must complete Form 941-X and submit it to the Internal Revenue Service (IRS) with an accompanying business tax return in order to claim your credit. The form must be completed online or by fax and include accurate information about your employees, such as names, social security numbers, dates of hire and wages paid.
You may submit your application via mail or online via the IRS website. To apply online, you’ll need a valid Employer Identification Number (EIN), copied pay stubs or W-2s showing each employee’s wages in the quarter you are claiming and a copy of a total wages reported on line 5 of your federal business tax return for the quarter. You will also need to provide information about any PPP loans received. Once all of this is provided, you’ll enter it into Form 941-X onscreen and digitally sign it before submitting it for processing.
Mail submissions require that you complete two forms; Form 941-X and Schedule A included with your form 941. In this case, you will also need to attach a check made payable to “United States Treasury” along with copies of payroll records showing wages paid during each quarter as well as copies of total wages reported on line 5f form 941 from the same quarters being claimed for credit purposes.
For either submission method, it typically takes eight weeks or more for approval after submission. If approved, employers will receive credit payments directly from the IRS based on their prior submitted information without any additional paperwork required from them – just sit back and wait!
Track your application status
To ensure that you are able to track the status of your application, the IRS recommends filing electronically. Filing an annual claim for a person with 20 or more employees will require you to use IRS Form 941-X. For an employer with fewer than 20 employees, you must file Form 7200.
If you submit Forms 941-X or 7200 electronically, the IRS site will provide confirmation and issue an acknowledgement after successful transmission. The acknowledgement includes a traceable control number that identifies each transmission and helps with tracking. If your applications are paper submissions, no acknowledgment is given after they are sent through the mail; however, they can be tracked using USPS Delivery Confirmation services.
You should also contact your payroll service provider or report writer technical support staff to track certain forms that require additional steps post submission. Submitting additional forms such as Forms 5478 and 8316 may help find out if the claim will be resolved in real-time or studied further by the IRS on Form 1045 dated October 2020 or later; there should be no need for another mailed submission in this regard.
Once you have applied for an employee retention credit for applicable wages paid between March 12th and December 31st of 2020, regular updates from the IRS should follow in order to stay informed about any changes which may affect your application process or resolution timeline going forward. Be sure to keep up with all relevant correspondence from local taxing authorities and related agencies as well in order to verify compliance along every step of your application process journey.
Employee Retention Tax Credit (ERTC) is a great way for businesses to get additional support from the government during the pandemic. There are a variety of programs available for businesses to apply for ERTC and fortunately, there are plenty of resources available to help you navigate the process.
In this section, we’ll discuss some additional resources that can help you get started:
The Internal Revenue Service (IRS) website (http://www.irs.gov) is a great resource for information on employee retention tax credits. You can learn more about eligibility requirements and how to claim the credit. Additionally, specific instructions are available for employers who qualify to receive advance payments of the credit, rather than claim it as part of their quarterly or annual income tax filing.
It is important to note that in order for employers to be eligible for these credits, they must meet certain criteria which includes keeping wages paid through December 31, 2020 and maintaining operations throughout the crisis caused by COVID-19. The IRS also offers an online tool that can help employers determine if they qualify for the Employee Retention Tax Credit.
IRS Taxpayer Guide
The Internal Revenue Service’s (IRS) Taxpayer Guide is an invaluable resource for employers looking to understand the Employee Retention Tax Credit. This guide provides information on claiming the tax credit, including eligibility criteria and the application process. It also explains the requirements employers must meet to claim the credit, such as filing Form 5884-C. Additionally, this guide outlines additional considerations and special programs associated with employee retention credits. Details on how best to document use of these credits are also provided.
The IRS Taxpayer Guide is an essential resource for employers looking for information about utilizing employee retention tax credits within their records and processes.
Other helpful websites
In addition to the U.S. Department of Treasury website and the IRS information page, other helpful sites include:
- Small Business Administration (SBA): The SBA’s website includes additional information about how to calculate, claim and maintain eligibility for the Employee Retention Tax Credit.
- Internal Revenue Bulletin (IRB): The IRB provides timely published guidance on rules, regulations and changes with regards to federal tax laws and procedures.
- Business Council of Alabama (BCA): The BCA has a page dedicated specifically to the Employee Retention Tax Credit that includes an FAQs section specifically related to businesses registered in Alabama.
- Center on Budget and Policy Priorities: This center provides a comprehensive look at coronavirus relief programs, including recent expansions of the employee retention program that apply both nationally and in various states.
- National Council of State Legislatures: The council offers information about all applicable state tax credits from one convenient resource. They offer up-to-date guidance on eligibility requirements for each state’s separate tax credit programs as well as information about updated procedures for claiming credit in 2020.