Overview of Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) provides a valuable tax credit for employers who have experienced financial hardships due to the recent pandemic. This tax credit can be used to offset payroll taxes, up to 50% of qualified wages paid. The key is to understand who qualifies for this tax credit, so let’s take a look at the details:
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit available to eligible employers that can help offset the cost of keeping their workforce employed. This credit is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed by Congress and signed into law in March 2020. It provides businesses that underwent a certain amount of revenue loss due to pandemic-related circumstances with funds to cover payroll costs for employees.
To be eligible for the ERTC, businesses must have had:
- Revenue reduction(s) due to various COVID-19 circumstances in 2020 compared to 2019
- Business operations reduced due to orders from a governmental authority regarding COVID-19 during appropriate periods
The ERTC pays businesses 50% of qualified wages up to $5,000 per employee per quarter from March 13th, 2020 through December 31st 2021. The credit then phases out if gross receipts exceed 80 percent decrease compared pre-pandemic levels. The credit also phases out as average annual wages increase beyond $50k and after 500 or more employees are retained during the year(s). Self-employed individuals may also qualify for the Credit on their self-employment income up to $10k/ tax year based upon their revenue losses for calendar year 2021 or 2020.
Businesses may choose either the carryback or carryforward method when claiming this refundable tax credit against available taxes owed on payroll quarters from March 13th through December 31st 2021. Employers who utilize Payroll Services Providers can apply this retroactively by amending quarterly payroll returns going back as far as March 13th 2020 in order receive cash back now rather than carrying it forward to a later tax period when filing taxes in 2021 or 2022.
Who is eligible for the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit against certain employment taxes equal to 50 percent of qualified wages that eligible employers pay to their employees. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.
To be eligible for the Employee Retention Tax Credit, a business must meet the following criteria:
- It must be an employer engaged in operations that were either partially or completely suspended due to orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19; OR
- It has sustained gross receipts during a specific 2020 calendar quarter which are less than 50 percent of the gross receipts it earned during the same 2019 quarter.
Eligible employers also must have been in operation during either 2020 or 2019 and have been able to demonstrate an average full-time equivalent employee count of at least one employee during the eligibility periods in order for annualized wages paid in 2021 and 2022 exceed $3,000 per employee. Employers must make good faith efforts to pay eligible wages out of pocket first before claiming them on their returns when they file.
The Employee Retention Tax Credit is available to certain businesses and tax-exempt organizations that have been financially impacted by COVID-19. In order to qualify, businesses must meet certain criteria. In this section, we will go through the qualifying criteria in detail:
- Criteria 1
- Criteria 2
- Criteria 3
- Criteria 4
- Criteria 5
The Employee Retention Tax Credit (ERTC) program, funded through the Coronavirus Aid, Relief and Economic Security (CARES) Act, offers tax credits of up to $5,000 per employee for businesses affected by the pandemic. The credit is designed to help cover costs such as wages and benefits paid throughout 2020.
To qualify for this credit, employers must satisfy criteria regarding workforce and wages. In terms of workforce requirements, employers must have either partially or fully suspended normal operations or have a significant decline in gross receipts compared to the same quarter in 2019 due to the COVID-19 pandemic. Further criteria are stated below:
- Employers must pay qualifying wages between March 13, 2020 and January 1, 2021 at a rate equal to or more than 50% of the usual compensation for employees on leave from work due to disruption caused by COVID-19 closures.
- The maximum amount of qualifying wages that can be used for this credit is $10,000 per employee per calendar year, including tips and other compensation not reported on Forms W-2.
- Any amount over $10,000 will not be counted towards the ERTC calculation.
Qualifying employers are organizations that are eligible to offer plan benefits. These employers must meet certain criteria in order to qualify, such as having multiple employees and engaging regularly in an ongoing business. Typically, only employers that are in business specifically to make a profit will meet the requirements for offering a qualified plan. Employers should contact their financial advisor to determine if they are eligible to offer plans.
In addition, employers should check with the Internal Revenue Service (IRS) for current information on who qualifies as an employer for purposes of offering qualified retirement plans. Generally, these include:
- Tax-exempt organizations
- Any business association or entity which is organized for profit-making activities and has at least one employee other than the proprietor or partner.
Some non-profit organizations may qualify as well. Finally, governmental units may be eligible applicants if they are organized under an act of Congress or have self-employed persons who have elected coverage under a section 125 cafeteria plan or rules of another government agency authorizing contributions towards qualified benefits programs.
Qualifying full-time employees
Full-time employees are workers who have regular working hours that are usually longer than those of a part-time employee. Full-time employment is often considered to be between 35 and 40 working hours per week, although the exact number of required hours can vary by occupation, employer, and location.
In order to qualify as a full-time worker, an employee must typically meet certain criteria set by the employer. These criteria may include:
- Working a minimum number of days per week (e.g., four or five).
- Having a minimum contracted number of working hours (e.g., 35 or 40).
- Meeting certain eligibility requirements related to time worked within the past 12 months.
- Meeting specific job duties and responsibilities (e.g., managing multiple projects or teams).
These criteria may be further broken down into subcategories (such as hours worked overtime) in order to determine whether an individual qualifies as full-time employment or not. Additionally, different types of employment may come with different qualifying criteria – for example, an individual employed under a government contract may need to meet additional requirements in order to qualify for full-time status.
Qualifying part-time employees
Part-time employees represent an important part of any organization and must be properly managed to ensure that they are treated fairly and in accordance with the organization’s policies. Qualifying part-time employees typically possess certain skills and experiences required to work effectively in a particular role. In order to ensure that a part-time employee meets the necessary criteria, organizations must first define what these criteria are and what they are looking for in a potential employee.
Organizations typically need to consider various factors when determining the qualifications of a part-time employee including:
- Work experience: Organizations must consider the experience of potential candidates including their prior work history, job performance reviews, references, certifications and other relevant documents.
- Education: Organizations should consider not just formal education, but also any unique training or certifications that may be beneficial for the job.
- Skillset: Responsible organizations should assess whether or not candidates possess the technical knowledge required to perform adequately within the position. This includes both hard skills related to specific software or competency tests as well as soft skills like customer service or team collaboration capabilities.
- Personality traits: Organizations should evaluate any intangible qualities such as ambition or leadership capabilities that could come into play in a more senior setting. Potential employers should assess how an applicant’s personality might fit into their existing team dynamic as well as whether they have an aptitude working with customers or other stakeholders within an organization.
Calculating the Credit
The Employee Retention Tax Credit (ERTC) is a refundable tax credit that can help businesses financially affected by the COVID-19 pandemic to keep employees on the payroll. To calculate the ERTC, you’ll need to consider several factors such as the number of employees, the average monthly wages, and the percentage of decline in gross receipts.
In this section, we’ll discuss how to calculate the ERTC for your business:
Calculation of wages
When calculating an employee’s wages, employers must take into account not just a worker’s base wages, but also any additional income that may be due under certain conditions. This might include benefits such as overtime pay, holiday pay, and company bonuses. When figuring total wages for a period of time, it is important to consider not only the employee’s regular wages but also any other sources of income that the worker may be eligible for.
- Overtime Pay: Employers are required to pay their employees at least one and a half times their normal wage rate for hours worked beyond 40 in one week. For example, if an employee earns $15/hour, they must be paid $22.50 per hour for any hours over 40 worked in the same week.
- Holiday Pay: Most employers offer holiday pay to their workers who do not have time off during a designated holiday. This payment is typically equal to 8% of the employee’s regular wages for each hour worked on or before the holiday.
- Bonuses: Bonuses can come in variety of forms and may include signing bonuses or performance-based awards. Bonuses should be documented by the employer and reported to federal agencies in order to remain compliant with regulations related to wage calculations and tax purposes.
When calculating wages, employers should take into account all applicable sources of income including overtime pay, holiday pay, bonuses or other forms of compensation before providing final payment figures to employees.
Calculation of credit
Calculating the Employee Retention Tax Credit (ERTC) can be complicated and a company should carefully review the formula to ensure that they are calculating their credit correctly. Generally speaking, the ERTC is a credit of up to $5,000 per employee for eligible wages paid between March 13, 2020 and December 31, 2020.
The amount of the ERTC is determined by an employer’s qualified wages paid, but employers should remember that only wages paid above certain thresholds are eligible. The threshold records can be reviewed here.
To calculate the credit first apply the wage limit per employee ($10K max), then subtract from this amount any wages taken into account for purposes of calculating payroll taxes in each quarter. The remaining amount can then be multiplied by 50% to calculate your Employee Retention Tax Credit (ERTC). Alternatively, employers may opt to take a 70% credit against Social Security taxes instead of a 50% credit against qualified wages for all four calendar quarters in 2020 in order to realize a larger benefit from this incentive program.
Employers must also determine if they meet certain eligibility requirements before claiming and collecting benefits through the ERTC program; these requirements include having operations partially or fully suspended as a result of government mandates or experiencing at least a 50% reduction in gross receipts on a quarterly basis when compared to 2019 gross receipts. A full review of eligibility requirements can be found on IRS website.
Calculation of maximum credit
Every year, the Internal Revenue Service sets the maximum amount of tax credit a taxpayer can claim. This credit is calculated by taking into account your total income and other applicable factors such as marital status, number of dependents and any additional sources of income.
The maximum credit for 2020 is $6,660 for individuals filing a single return or married couples filing jointly. Other credits may be available depending on your situation. The following provides a step-by-step guide to calculating the maximum allowable credit:
- Calculate Your Adjusted Gross Income (AGI): The AGI is an important measure used to determine eligibility for various deductions and credits. It is also used to estimate taxes owed, so it’s essential that your AGI is accurate.
- Determine Your Tax Bracket: This step determines how much of the earned income credit you are eligible to receive. If your taxable income falls within certain ranges, you may qualify for larger credits than those listed below.
- Calculate Modified Adjusted Gross Income (MAGI): The MAGI is often considered in tax calculations and will be used to determine whether or not you can receive additional credits that are not based on taxable income, including deductions or credits related to retirement savings or adoption expenses, etc., as well as special credits available to veterans or disabled taxpayers, etc., that may further increase your total refundable amount if they apply in your case.
- Add Any Qualifying Credits: After determining all applicable deductions and adjusting accordingly with the MAGI determination outlined above, the next step includes adding together all qualifying credits from each category which may include; an earned income credit (EIC), dependent care credit (DCC), child tax credit (CTC), Adoption Credit (AC), Higher Education Credits such as Lifetime Learning Credit (LLC) Foreign Tax Credit only if earned outside the United States).
- Subtract Any Non-Qualifying Credits: Non-refundable tax credits reduce refunds but do not eliminate any amount due above what was withheld during the tax year such as taxes paid on early withdrawals from IRAs or excess real estate taxes paid due to property assessment changes etc.. In this case these non-qualifying items must be subtracted from total refunds before finalizing calculations..
- Final Calculation: After subtracting non-qualifying items if applicable in Step 4b , add Together remaining qualifying items totaling up overall eligible amount potentially refundable back multiplied against specific filing status percentage rate ie Married Filing Jointly 0% – 15%. Total computed rounded off after taken into consideration any filing fee of $33 when preparing returns electronically will yield final calculation against total expected refundable amount back when filing IRS Form 1040 Schedule D Line 29 Available Earnings Credit.
Filing for the Credit
The Employee Retention Tax Credit was created to help employers affected by COVID-19. To qualify for the credit, employers must have operations that were fully or partially suspended due to government orders or experience a significant decline in gross receipts. If you meet these criteria, you can apply for the Employee Retention Tax Credit and start receiving funds from the IRS.
Let’s go over the steps for filing for the credit:
Who can file for the credit
The Child and Dependent Care Credit can be claimed by eligible taxpayers who have paid someone to care for a qualifying individual while they work or look for work. A qualifying individual is a dependent child under the age of thirteen, or an incapacitated adult who lives with you and is claimed as a dependent on your return. In certain circumstances, you may also be able to claim the credit for expenses related to care for other individuals who qualify as your child or dependent.
Eligibility requirements vary depending on how much income you earn, how many children are in the same household, and other family situation considerations. Generally, taxpayers whose adjusted gross income (AGI) is less than $15,000 can claim up to 35% of their expenses, while those with AGI over $43,000 can claim up to 20%. AGI falls in between these points should estimate what their allowable credit would be using IRS Publication 503.
How to file for the credit
When filing for the credit, it’s important to remain organized and provide all of the required documents at once. Here are the steps you need to take when you’re filing for the credit:
- Gather your documentation – Before you can fill out any paperwork, make sure you have all of your paperwork in order. This includes a copy of your valid identity document, proof of income, tax documents (if applicable) and other forms that may be requested by the issuing agency.
- Read all instructions thoroughly – When filling out an application or form related to the credit, be sure to read through all instructions provided by the agency thoroughly. Ask questions if anything remains unclear – having incomplete or incorrect information can delay approval and payment.
- Submit application – Submit your completed application with all required documents attached and wait for payment confirmation. Once approved, payments should arrive within two weeks if filing electronically or four weeks if filing through a mail-in process (depending on the issuer). Keep in mind that additional forms or information may be requested if additional proof or verification is needed from you in order to fully process your request.
When to file for the credit
The employer must file for the Employee Retention Tax Credit before the end of the tax year in which it is claiming the credit. For example, if an employer is claiming a credit for qualified wages paid during 2020, then it must file its claim for that credit before December 31, 2021. Once an employer has chosen to use the credits, it cannot amend its return to claim a higher amount of credits after that date.
In addition, an employer must elect to apply all available credits in one tax year and cannot spread them across multiple tax years in order to increase their tax savings. However, an employer has the option of filing separate claims in different quarters of the same tax year but needs to indicate on each claim when they are electing not to carry forward any unused amount from prior quarter claims.
The deadline for filing Form 941 and any other IRS forms related to a claim for Employee Retention Tax Credit can be extended until June 30, 2021 by filing Form 8888 specifying that an election has been made under Section 2305(a)(3) of CARES Act.