Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit is a tax credit that was implemented by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide relief to employers who have faced economic hardship due to the pandemic. This tax credit provides employers with a tax credit equal to 50% of qualified wages paid to employees in 2020, up to a maximum of $5,000 per employee.
Let’s take a look at who qualifies for this tax credit and how it works:
Definition of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a federal tax credit created to help employers struggling with the economic effects of the coronavirus pandemic. It is one of several relief initiatives authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed by Congress in March 2020.
The ERTC provides refundable tax credits for up to 50% of the qualified wages and qualified health plan expenses an employer pays to each of its employees up to $10,000 annually between March 13, 2020 and December 31, 2020. The credit is available to employers whose operations have been fully or partially suspended due to a governmental order that limits commerce as a direct result of COVID-19. Employers whose revenues have been reduced by at least 20% compared to the same quarter in 2019 are also eligible for the credit.
Other eligibility requirements include:
- Maintaining an active business throughout the claim period.
- Having kept wages on payroll despite any suspensions or reductions in operations resulting from COVID-19.
- Businesses who receive Paycheck Protection Program loans are not eligible for this credit – they receive other forms of financial relief through their PPP loan forgiveness program.
The Employee Retention Tax Credit is a type of tax credit designed to help businesses with employee retention expenses. Companies of all sizes are eligible for the Employee Retention Tax Credit, with certain restrictions, if they experience one or more of the following impacts due to the coronavirus and its associated economic effects:
- Full or partial suspension of operations due to orders from a governmental authority limiting commerce or travel;
- A significant decline in gross receipts compared to the same calendar quarter in the prior year.
In order to qualify for this credit, employers must meet several qualifying criteria. These criteria may vary from one jurisdiction to another and are subject to change depending on ongoing government regulations. Generally, they include withholding payroll taxes as well as filing form 941 quarterly reports. Additionally, employers must maintain all records related to their business activities including any COVID-19 related furloughs and layoffs and any normal business activities that have continued despite pandemic measures.
Additionally, employers must employ 500 or fewer full-time employees when combining all business establishments owned by that employer. Businesses with over 500 employees could still qualify if they’ve experienced a sharp decline in revenue which has impacted their ability to keep employees on their payroll during this challenging time. All industries – including nonprofit organizations – can take advantage of this benefit when meeting these requirements.
The Employee Retention Tax Credit (ERTC) is a refundable tax credit available to qualifying businesses due to effects of the COVID-19 pandemic. To be eligible for the credit, businesses must meet certain criteria. Some of the common criteria include:
- Having gross receipts that are less than certain thresholds;
- Having been subject to a government order to limit operations; and
- Having experienced a reduction in business as a result of the pandemic.
This section will discuss the requirements for businesses to qualify for the ERTC.
Businesses That Have Experienced a Full or Partial Shut Down
The Employee Retention Tax Credit applies to businesses that have either been fully or partially shut down as a result of local, state, or the federal government orders relating to the COVID-19 pandemic during the calendar quarters beginning after December 31, 2019 and ending on December 31, 2020.
In order to qualify, businesses must meet one of two requirements:
- The business has been fully or partially suspended by an applicable governmental order due to COVID-19 during the quarter; OR
- The business has experienced a significant decline in gross receipts in the quarter compared to the same quarter in 2019. If they qualify under this requirement, they must show at least a 50% decline in gross receipts for their chosen calculation period (either one or two quarters).
Businesses can also qualify if they are part of a controlled group (which includes any organization composed of three or more entities with 80% common ownership). All members of this controlled group will be treated as a single taxpayer for calculating gross receipts and shut down periods.
For detailed information on eligibility requirements and calculation figures for both full and partial shutdowns, please refer to IRS guidance released from March 19th onwards.
Businesses That Have Experienced a Significant Decline in Gross Receipts
The CARES Act created the Employee Retention Tax Credit (ERTC) to encourage businesses of all sizes to keep their workforces employed during the Coronavirus Disease 2019 (COVID-19) health crisis. To qualify for the credit, a business must have experienced either a full or partial suspension of operations due to governmental orders related to COVID-19, or have experienced a significant decline in gross receipts.
Businesses with 100 or fewer employees may be eligible for the full CRTC if they have experienced a significant decline in gross receipts as compared with 2019. Eligibility is determined by looking at prior calendar quarters and comparing quarter-to-quarter gross receipts for 2020 versus 2019. If gross receipts are less than 50% of what they were for the same quarter in 2019, the employer is eligible for up to $5,000 per employee credit.
Large businesses with more than 100 employees using putative payrolls may also qualify if they can show that their workforce has been reduced by 20% from pre COVID levels or if they can demonstrate that both revenue and wages decreased during one quarter in 2020 as compared with the same quarter in 2019. The amount of credit available to larger employers is commensurate with how much revenue was impacted; wages paid are capped at $10,000 per employee. The total amount of credits available cannot exceed more than $5 million per employer.
The Employee Retention Tax Credit 2020 allows employers to claim a credit on wages paid to their employees during the COVID-19 pandemic. In order to qualify for the credit, the employer must pay wages to employees that meet certain criteria. This criteria includes:
- The amount of wages paid
- The number of employees employed
- The time period during which the wages were paid.
Let’s explore the requirements for qualifying wages for the Employee Retention Tax Credit 2020.
Qualified Wages Paid to Employees
The Employee Retention Tax Credit (ERTC) is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. In order to receive this credit and qualify for the ERTC, wage payments must meet several requirements set by the Internal Revenue Service (IRS).
Qualified wages are those paid to a qualifying employee for services provided during either of two periods:
- From March 12, 2020 through June 30, 2020; or
- From July 1, 2020 through December 31, 2020.
Additionally, qualified wages are capped at $10,000 per eligible employee. This includes wages paid during both time periods but cannot be combined – must be paid separately per time period up to $10K. Therefore an employer can receive a maximum credit of $5K per eligible employee – $2.5K for each period of qualified wages.
The employer must also provide documentation regarding payment and social security number information in order to receive the credit. To securely provide IRS with this information employers must use single use access code generated through their e-Services Accounts on Irs.gov following all other applicable IRS rules and regulations related with proper filing procedures and record keeping requirements once their participation in the ERTC program is completed.
Maximum Credit Allowed
The Employee Retention Credit (ERC) is a refundable tax credit available to certain businesses that remain open and pay wages in 2020. The ERC offsets the employer’s portion of Social Security taxes, so it is not eligible for employers who are already receiving Paycheck Protection Program loans.
The amount of the ERC allowable is 50% of qualified wages paid to employees for up to $5,000 for each employee. The maximum amount of the credit available to each eligible employer is limited overall per quarter:
- For employers with 100 or fewer employees, the maximum amount allowed is $5,000 x 100 = $500,000;
- For employers with over 100 employees, there is a formula used to calculate the max allowable. Employers with up to 500 employees can claim a credit equal to 50% of their total qualified wages per quarter multiplied by a fraction representing the number of their employees that were employed on average during either in 2019 or 2020 (whichever period has less employment) divided by 500.
Be aware that any payments made through Paycheck Protection Program loans are not eligible for this program and must be subtracted from total payroll costs when calculating qualified wages for the purposes of this plan.
How to Claim the Credit
The Employee Retention Tax Credit (ERTC) was established through the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020. This tax credit is designed to provide financial relief for employers who have faced economic hardship due to the pandemic in the form of a tax credit against their Social Security taxes. To qualify for this credit and redeem it, employers must follow certain steps.
This guide will explain how to claim the ERTC:
When claiming the Employee Retention Credit, employers may be required to provide documentation such as payroll records, proof of a reduction in business operations or gross receipts, and/or records to demonstrate payments made. Employers must also file a completed IRS Form 5884-C with their federal income tax return for the year the credit is being claimed.
In order to substantiate an employer’s eligibility for claiming the Employee Retention Tax Credit, the following documents must be on file:
- Proof of a significant decline in gross receipts (documentation showing year-over-year decreases between quarters)
- Documents demonstrating that wages were paid through a payroll system
- Payroll registers or filings with state or local governments
- Records verifying total wages paid each calendar quarter
- W2 forms for employees
By gathering these documents before filing any form or claim for credit with the IRS, employers will find it easier to receive timely credit approval.
How to Claim the Credit on Your Tax Return
The Employee Retention Tax Credit is a refundable tax credit against certain employment taxes equal to 50% of up to $10,000 in qualified wages. This credit has been extended through June 30, 2021 and expanded for the 2021 tax year.
If your business qualifies for this tax credit, you must elect the credit when filing your quarterly employment taxes or when filing your income tax return (Form 941 or Form 944). Qualified wages paid after March 12, 2020 and before January 1, 2021 are eligible for the full 50% credit.
For businesses claiming credits for wages paid after December 31, 2020 but before July 1, 2021, the maximum eligible amount of qualified wages is $7000 per quarter rather than the original $10K cap. The minimum amount of wages that must be paid per employee will also increase from $5000 to $6000.
To claim the credit, eligible employers should take the following steps:
- Determine your eligibility – review IRS Notice 2020-35 or check with your professional tax advisor to understand if you qualify for this tax credit based on business requirements and employee status (including employees furloughed due to COVID-19).
- Calculate qualified wages including health benefits expenses – review IRS Notice 2020-12 and use Schedule A worksheet to determine total qualified wages that can be claimed as part of this credits as well as related health care expenses.
- Report when filing income and employment tax return – claim half of calculated qualified wage amount as refundable Tax Credit when reporting income and employment taxes on Forms 9 41orForm 944 respectively). Include detailed calculation worksheet with related tax return for audit purposes and prepare Form 3800and ScheduleA with required information about employer’s estimated entitlement ·as partof regular income return in April 2021 once all quarterly returns are filed·
When determining eligibility for the Employee Retention Tax Credit (ERTC) in 2020, there are several other considerations that apply. These include the size of the employer, whether wages are paid for services performed in the US, and many more.
In this section, we’ll walk through some of the other considerations for determining eligibility for the ERTC:
- Size of the employer
- Whether wages are paid for services performed in the US
- And many more
In addition to understanding the basics of the Employee Retention Tax Credit, it’s important to explore other resources that can supplement your knowledge and help ensure that your business is taking full advantage of this valuable tax credit.
For a comprehensive overview of the Employee Retention Tax Credit, visit the IRS website, where you can find information about eligibility criteria, allowable expenses, how to claim the credit and more. Additionally, seek advice from an expert in tax law or a certified public accountant (CPA) to ensure that you are taking advantage of all available deductions and credits.
The US Small Business Administration (SBA) website is a valuable resource for small business owners. The SBA website contains helpful information about key topics related to managing a business such as navigating financial challenges during times of economic stress due to COVID-19. In addition to providing access to resources on support programs like Paycheck Protection Program (PPP) loans, disaster assistance loans and economic injury disaster loans (EIDL), SBA also offers free resources such as seminars on how businesses can enhance their financial practices.
Outreach efforts by several governmental organizations – such as the New Jersey Business Action Center – help local businesses stay up-to-date on critical information related to aid programs like the Employee Retention Tax Credit program. For state specific programs and resources related to aid packages targeted at helping businesses during this time of crisis due to COVID-19 pandemic, contact your state’s department of labor or equivalent department in your state or locality.
Impact on Other Tax Credits and Deductions
The federal Employee Retention Tax Credit (ERTC) is an important tax benefit for employers affected by the COVID-19 pandemic. The ERTC applies to wages paid between March 13, 2020, and December 31, 2020. This can have an impact on other tax credits and deductions that a company may qualify for.
Here are some additional things to consider:
- The ERTC can significantly reduce a business’s taxable income, potentially impacting its eligibility for other federal tax credits such as the Research and Development Tax Credit or Work Opportunity Tax Credit.
- Since wages paid with the ERTC are subtracted from an employer’s gross earnings when calculating its taxable income, it could affect the amount of deductions that would normally be allowed for certain expenses such as employee benefits or charitable contributions.
- The ERTC must also be factored into a company’s calculation of accrued sick pay since it will reduce their gross earnings from which their liability is calculated.
- Finally, any bonuses or awards given to employees as part of the ERTC must be reported on each employee’s W2 but cannot be counted towards self-employment taxes or social security taxes due for that individual for the tax year in which payment was made.