Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was created in response to the Covid-19 pandemic to help employers pay for employee wages and other expenses. It is a refundable tax credit from the IRS that employers can claim up to $5,000 per employee as a reimbursement for what they pay in wages.
Let’s take a look at who qualifies for the ERTC in 2021 and any other details you need to know:
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit created by the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020. It is designed to assist businesses and other entities that have been significantly impacted by COVID-19. Employers may be eligible for a credit against employer Social Security payroll taxes equal to 50% of qualified wages paid to employees from March 12, 2020 to December 31, 2020 with a maximum of $5,000 for each employee.
The ERTC applies to both full-time and part-time employees with respect to wages paid regardless of furlough or reduced hours. Qualifying wages are subject to phase out rules as described below. Additionally, an employer may not use qualified wages recipients from the Paycheck Protection Program or other lost revenues programs such as the Families First Coronavirus Response Act or Disaster Loan programs under the Small Business Administration’s Economic Injury Disaster Loan program when calculating its qualified wage amount for purposes of the ERTC.
The criteria that must be satisfied in order for an employer to be eligible for the ERTC includes:
- The employer must have suspended operations at any time during calendar year 2020 due to governmental orders limiting commerce, travel or group meetings due to COVID-19; or
- Experienced a significant decline in gross receipts during one calendar quarter in 2020 compared with either:
- The corresponding quarter in 2019;
- The same quarter of 2019; or
- The average gross receipts for quarters in 2019 quarterly comparison periods prescribed by IRS regulations as published on irs.gov
An employer can qualify if it received a loan under the Paycheck Protection Program (PPP) and/or has received Economic Injury Disaster Loan. Additionally parents, spouses and dependents may claim this credit on behalf of their employers when filing their tax returns unless those employers file on a consolidated basis with the parent company.
How does the Employee Retention Tax Credit work?
The Employee Retention Tax Credit (ERTC) is an employer-side payroll tax credit created as part of the CARES Act to incentivize businesses to keep employees on their payrolls despite reduced revenues during the fiscal year. The ERTC provides refundable income tax credits to employers equal to 50% of wages paid up to $10,000 per employee from March 13, 2020, through Dec. 31, 2021.
It’s important for eligible employers that haven’t yet applied for the Employee Retention Tax Credit (ERTC) to review their unclaimed credits and consider applying for them. Employers may be able to receive retroactive refunds for qualified wages paid in 2019 and 2020 going back as far as January 1st, 2021. Securing such funds can provide much-needed relief from the impact of the pandemic on revenue and make your business operations more sound.
To qualify for the ERTC, employers must meet certain eligibility requirements:
- They must have experienced either a full or partial suspension of operations due to governmental orders related to COVID-19; or
- they must have experienced a significant decline in gross receipts during any calendar quarter in 2020/2021 compared with the same calendar quarter in 2019.
In addition, employers must pay at least $10 per hour on average during 2021 and include health plan payments when calculating eligible wages subject to taxes.
Employers who do not meet these requirements may still be eligible if their employees are members of certain groups identified by the IRS website or if they meet one of several additional qualifications outlined by the IRS website. Eligible employers should act quickly if they want claims for potential credits; all relevant claims must be made before Dec. 31, 2022 and contact an HR professional or trusted tax advisor before taking action if unsure about whether you qualify or not.
The Employee Retention Tax Credit was introduced in the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act). It is a refundable tax credit that is available to employers who have experienced a decline in business due to the COVID-19 pandemic. In order to qualify for the credit, employers must meet certain eligibility requirements.
Let’s find out what these requirements are:
Who is eligible for the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit that is available to employers that have been affected by the COVID-19 pandemic. The credit can potentially be used to offset up to 50% of qualified wages that are paid by eligible employers.
In order to qualify for the ERTC, employers must meet certain eligibility criteria. To qualify, employers must have experienced either a full or partial suspension of their business or had gross receipts fall below 50 percent relative to the same quarter in the previous year. In addition, only those employers whose revenues did not exceed $10 million in the 2019 calendar year are eligible for the ERTC.
Qualified wages for employees making more than $10,000 will generate a $5,000 tax credit per employee each quarter and those making less than $10,000 can generate up to $7,000 per employee each quarter. However, there are exceptions for small businesses – if one has fewer than 100 employees full-time and part-time combined – they can receive qualified wages up to what they paid in 2019 on all their employees regardless of whether they worked at any time during 2020 or 2021; otherwise an actual payroll amount would determine their qualifications per employee per quarter themselves.
Additionally, it’s important for eligible employers to note that seasonal workers who work for 120 days or less during 2021 cannot qualify as an ‘eligible employee’ for the purposes of this program. Only full and part-time employees who worked throughout 2020 and 2021 would be eligible when claiming this tax credit. Employers seeking assistance should be sure to review all requirements thoroughly before filing in order ensure compliance with qualification regulations set forth by the IRS.
What are the qualifications for the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit for employers that retain employees and continue to pay them, even when operations are partially or fully suspended due to COVID-19 related shutdowns. Employers of all sizes are eligible for the ERTC, whether they have or have not received benefits from other coronavirus-response programs like the Paycheck Protection Program (PPP).
To qualify for the ERTC, an employer must meet these two requirements:
- Have carried on a business in calendar year 2020
- Experienced either a full or partial suspension of operations during calendar year 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19
In addition to the two criteria above, employers must also meet one of two additional criteria depending on their total average number of employees in 2019. It should be noted that businesses that begin operations after February 15th, 2020 do not qualify for this credit.
- Employer with 100 or fewer full-time employees: The employer must pay eligible employees up to $10,000 total in qualified wages per employee between March 13th and December 31st of 2020.
- Employers with more than 100 full time employees: The employer must pay eligible employees their salary at least 50 percent less than normal between March 13th and December 31st of 2020.
It is important for employers to note that the ERTC is calculated based on wages paid beginning after March 12th and is available until December 31st of 2021. Furthermore, eligible wages cannot be taken into account both for this credit as well as other relief provisions such as those outlined in section 139E of Internal Revenue Code – Emergency Paid Sick Leave Act and Emergency Family Medical Leave Expansion Act.
Calculating the Employee Retention Tax Credit
In 2021, the Employee Retention Tax Credit can be a huge help to businesses who have gone through financial hardship due to the pandemic. This tax credit can be claimed by eligible employers and can help provide relief to oftentimes-strained business budgets.
To determine if a business qualifies for the Employee Retention Tax Credit, and how much they are eligible for, it is important to understand how it is calculated:
How do I calculate the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) offers a refundable tax credit to employers in 2021 and up to March of 2022. To be eligible, businesses, nonprofit organizations, and governmental entities must meet certain criteria regarding revenue losses and employee pay during 2020. Employers who qualify can receive a refundable credit equal to 70% of their employee’s wages up to a maximum of $10,000 per employee or $50 million in total credits.
To calculate the amount of owner-employee payroll taxes that may be eligible for the ERTC:
- Start with the employee’s wages from 2020 or 2021 (if the employer elected Carryback Election Option).
- Subtract any covered wages for which an ERTC was claimed for one quarter of 2020; include in this calculation any wages paid after September 30, 2020.
- Determine the applicable employer portion Social Security taxes owed on those remaining wages, not yet claimed for an ERTC credit.
- Multiply the Social Security taxes by 0.7 to determine Qualified Wages under which 50% might qualify depending on prior quarter revenue decreases and use as an allowed credit in upcoming quarters if needed taking into account that 70% is the maximum eligible under this program year 2021 may be higher after further clarification from IRS.
The maximum amount for 2021 that may be claimed is $50,000 per employer plus any additional amounts allowed by Congress at a later date if more clarification on qualifying issues is forthcoming from IRS guidelines related eligibility requirements set forth in federal law.
What expenses are eligible for the Employee Retention Tax Credit?
When attempting to calculate the Employee Retention Tax Credit (ERTC), employers and other business owners should be aware of which expenses are eligible for this credit. In order for an expense to qualify, it must be paid or incurred after March 12, 2020, and before January 1, 2021, and must meet the following criteria:
- Payroll costs paid to an employee during the period of April 1 – Dec 31, 2020.
- Qualified health plan expenses allocated to wages paid during the period of April 1 – Dec 31, 2020 that are either funded by a governmental entity (even if provided through a private insurer) or fully insured by a private insurer.
- The portion of employer Social security tax not forgiven under section 2302(a)(2) of CARES Act.
In addition to the above requirements, employers should also be sure that they keep all eligible documentation in case they need to file for an ERTC claim at some point in time. Examples of eligible documents include payroll reports and qualified health plan records that demonstrate that the payouts made comply with IRS requirements. Keeping organized records and documentation will help ensure that employers get their maximum ERTC eligibility and have proof in case they need it later on down the line.
Claiming the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a federal tax incentive that helps employers retain their employees during the ongoing COVID-19 pandemic. For 2021, businesses are eligible to claim the ERTC if they experienced a significant decline in gross receipts or meet certain other requirements.
This section will explain who is eligible to claim the credit and how to do it.
How do I claim the Employee Retention Tax Credit?
Taxpayers who are eligible for the Employee Retention Tax Credit (ERTC) can claim it on Form 941 for each quarter in which the credit is available. To claim the ERTC, you must check the box labeled “Retention Credit” on Line 16 of Form 941. The ERTC must be filed with your regular quarterly filing and should not be included in your end of year tax return.
You may need to make adjustments to other lines on Form 941 when you calculate and claim the ERTC. For example, if an employer has reduced its payroll taxes because of taking advantage of certain incentives under the CARES Act, it may need to make additional adjustments to accurately report income and wage information.
Once you have properly claimed the ERTC, you must complete additional paperwork depending on how your business is structured. If your business is a corporation, you will then need to complete Form 4466 and include it with your corporate income tax return when filing with IRS Form 1120 or 1120S. Similarly, if you are an individual filing as a sole proprietorship or single member limited liability company (LLC) filing as a disregarded entity, then you will need to complete Schedule K-1 along with IRS Form 1065 for partnership income tax returns or IRS Form 1120S for S corporation returns whenever applicable.
What documents do I need to claim the Employee Retention Tax Credit?
In order to claim the Employee Retention Tax Credit (ERTC) 2021, employers must provide some basic documentation to the Internal Revenue Service (IRS). The required documents include information such as payroll tax returns, wage statements, and a statement certifying that the employer has paid and continues to pay wages for all employees during each quarter of the 2021 calendar year for which it is claiming the credit. Additionally, any applicable documentation should also be included with your claim. This can include items such as payroll records that show your total wages paid, and evidence of payment of wages if paid in cash or other forms such as gift cards or virtual currency.
You may also need to provide records to demonstrate that you suspended business operations due to pandemic restrictions or economic conditions resulting from COVID-19 related closures.
The IRS also requires that records relating to taxes imposed on employees must be kept for at least four years from the date of filing a 2020 Form W-2 with respect to income tax withholding and four years after submitting quarterly employment reports with respect to FICA taxes withheld. To establish a claim of full or partial suspension of business during a calendar quarter due to either pandemic restrictions or economic hardship related closures, employers must provide supporting documents such as:
- Renewal orders imposed by state and local governments
- Attestations by borrowers claiming forgiveness under section 1106(b) of the CARES Act
- Corporate minutes related to closures
- Employee communication regarding suspensions in operations
- Proof of payment of Retirement Plan Administration Fees qualifies towards maximum allowable credit amounts guaranteed under the ERTC program established by President Trump’s Executive Order dated April 28th 2021.
If you’re looking for more information about the rules of the Employee Retention Tax Credit 2021, there are plenty of resources available. You can find information from government websites, legal professionals, tax experts, and other sources. This section will detail what kind of additional resources are available to help you navigate the specifics of this tax credit.
These resources include:
- Government websites
- Legal professionals
- Tax experts
- Other sources
Where can I find more information about the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit available to employers impacted by COVID-19. The credit provides up to $5,000 per employee for eligible wages paid from January 1, 2021 through June 30, 2021. Employers may also be eligible for an Extended Payroll Tax Credit which applies to wages paid after December 31, 2020.
There are several resources you can access for more information on the Employee Retention Tax Credit. The IRS offers an informational page on their website outlining eligibility requirements and tax credit calculation procedures so you can determine if your business qualifies and how much of a tax credit you can receive. Additionally, the US Department of Labor has published two FAQs – one addressing basic ERTC questions and another intended to help employers understand how ERTC applies specifically to those that have experienced non-seasonal historically high unemployment rate or experienced significant gross receipts decline in 2020 due to COVID-19 impacts. The Small Business Association also provides additional guidance on their website as well as related news updates regarding changes or updates in the ERTC legislation or application processes. Local accounting firms or tax preparers may also be able to provide up-to-date guidance on paying taxes and taking advantage of government programs such as this one for businesses affected by the pandemic.
Are there any other tax credits available?
The Employee Retention Tax Credit (ERTC) is a valuable tax credit for employers who have been adversely affected by the COVID-19 pandemic, however there are several additional tax credits that may be available to help employers reduce their tax liability. Employers should consider reviewing the following programs to determine if they are eligible and could benefit from further financial assistance:
- Paycheck Protection Program (PPP). The PPP provides forgivable loans to assist businesses in covering certain payroll-related costs and other specified expenses. The Small Business Administration also offers numerous resources on how to apply for and manage a PPP loan.
- Work Opportunity Tax Credit (WOTC). WOTC is a federal tax credit provided to employers who hire employees from specific target groups that face significant barriers to employment. Employers can receive a maximum of $2,400 per employee, depending on wages paid during the first year of the employee’s work.
- Hiring Incentives Reinvestment Act (HIRE). HIRE offers businesses, who hired previously unemployed individuals, an 8 percent payroll or income tax credit for wages paid after December 31, 2020 and before January 1, 2022. This temporary payroll tax exemption must be claimed as soon as possible after hiring a HIRE eligible individual.
- Federal Empowerment Zone/Renewal Community Tax Credit (EZ/RC). EZ/RC allows employers operating in an economically distressed area to take advantage of reduced federal income taxes based on either their net increase in employees or the amount of wages paid each year. The credit can range up to 20 percent of qualified investment performance cost for EZ businesses and up 10 percent for RC businesses depending upon qualifications such as type of business location within designated zones and community partnerships.