Who Qualifies for the Employee Retention Tax Credit

by

Contents

Overview of the Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) is an incentive created by the CARES Act to help businesses keep employees on payroll during the coronavirus pandemic. Businesses can qualify for up to $5,000 to cover wages paid to employees.

This section will provide a full overview of the Employee Retention Tax Credit and who qualifies.

Definition of the Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) was introduced as part of the CARES Act to provide relief to small businesses affected by the coronavirus pandemic. The tax credit reimburses employers up to a certain percentage of employee wages and healthcare costs. The ERTC amount depends on the size of the business, plus wages paid and health care costs incurred. Eligibility for this credit is determined by whether or not an employer has seen gross receipts decrease during a calendar quarter from 2019 and/or 2020 due to COVID-19.

To be eligible for the ERTC, an employer must have:

  1. A gross income decrease of 20 percent or more due to COVID-19 and/or
  2. Suspend operations due to a governmental order related to COVID-19.

Those eligible are also subject to additional requirements related employment taxes and rates of payment. For example, businesses that were booked up before COVID-19 but experienced losses afterward would likely qualify for the ERTC because they can show their gross receipts dropped 20 percent or more during 2020.

Furthermore, employers must file IRS Form 941 (Employer’s Quarterly Federal Tax Return) quarterly in order to claim eligibility for this tax credit beginning in 2020 through June 30th 2021. Form 941 is used to report factors that impact employee payroll such as any wages paid, federal income taxes withheld from employees’ paychecks, Social Security taxes and Medicare taxes. Furthermore, these forms need to be filed even if there are no taxes owed for any given quarter as long as there were employees worked during that quarter.

Businesses also need to provide other payroll documents along with their filing form such as wage statements (Form W-2), information about withholding state taxes and other relevant documents such as unemployment insurance reports depending on the state in which they operate. It’s important for businesses considering applying for this credit to familiarize themselves with filing instructions before submitting their paperwork; failure do so could result in nonrecognition of eligibility and penalties assessed by the IRS.

Eligibility Requirements

The Employee Retention Tax Credit (ERTC) was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in an effort to provide support for businesses that have been adversely affected by the COVID-19 pandemic. The ERTC is a refundable tax credit available to employers who experience a full or partial suspension of operations due to governmental orders restricting commerce, travel or group meetings due to COVID-19, or a significant decline in gross receipts of the taxpayer.

In order to qualify for the ERTC, businesses must meet certain eligibility requirements:

  • The business must have been in operation since February 15th, 2020 and had employees on payroll;
  • The business must experience either a full or partial suspension of its operations as a result of governmental orders such as closure orders due to COVID-19; or
  • The business must have experienced a significant decline in gross receipts from quarter 1 of 2020 when compared with quarter 4 of 2019. A “significant decline” is defined as a decrease in gross receipts of more than 50%, measured on month over month basis. Additionally, if you are part of an affiliated group of corporations filing one consolidated return, then you may elect to take into account all such entities’ gross receipts combined when determining if there has been a significant decline.

Qualifying Businesses

The Employee Retention Tax Credit is a tax break for businesses in response to the COVID-19 pandemic. To qualify for the credit, you must meet certain criteria. In this section, we’ll discuss which businesses qualify for the tax credit, including:

  1. The size of the business.
  2. The impact of the pandemic.
  3. The time period during which the credit is applicable.

Businesses That Have Experienced a Significant Decline in Gross Receipts

Employers that have experienced a significant decline in gross receipts compared to the same quarter in 2019 can qualify for the Employee Retention Tax Credit. To determine if your business has qualified, compare the gross receipts for each of the quarters of 2020 with those in the corresponding calendar quarters in 2019. If it is determined that there’s been a significant decline in gross receipts, you may be eligible to receive the Credit.

Significant decline is defined as an overall reduction of more than 50% total gross receipts between any quarter of 2020 and corresponding quarter of 2019.

Businesses such as partnerships, S corporations, LLCs taxed as partnerships or S corporations, trusts and estates are eligible for coverage if their quarterly average amount of full-time employees during 2019 was 100 or fewer. The amount will be calculated by adding up their total wages from all applicable quarters during 2020 and comparing it to its wages from all applicable quarters during 2019. Wages paid before March 13th cannot be used for this calculation.

In addition, employers must not have already taken advantage of any other credits available through the CARES Act to qualify for this particular credit. If an employer previously received Paycheck Protection Program (PPP) funds during any period starting after December 31st 2019 and before October 1st 2020 they are not eligible to use this credit until they have fully spent those PPP funds or exclude them on IRS form 941 “Employer’s Quarterly Federal Tax Return” where applicable line 16h applies (qualifying employer certifying eligibility).

Businesses That Have Been Fully or Partially Suspended by Government Order

Businesses that have been fully or partially suspended by governmental orders due to COVID-19 may be eligible for the Employee Retention Tax Credit. According to the IRS, employers whose operations are fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings during 2020 due to COVID-19 are eligible for this credit. This applies whether the suspension was imposed by the federal government or a state, locality, or tribal government.

To qualify for the credit under these circumstances, an applicable employer must have had an applicable trade or business operating either:

  1. In at least one calendar quarter during 2020 prior to its partial or full suspension; and/or
  2. Was not in operation due to a full or partial governmental shutdown prior to December 31, 2020.

In addition, employers must pay their employees while they are partially or fully suspended and meet certain other requirements. Eligible employers can receive a credit equal to 70% of qualified wages paid from March 12 through Dec. 31 2020 subject to certain caps.

Qualifying Employees

The Employee Retention Tax Credit (ERTC) is a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed in 2020. The credit is meant to help businesses offset the costs of wages and healthcare benefits for employees who worked for the business during the year 2020.

To be eligible for the credit, an employee must meet certain criteria. This article will look further into these criteria and discuss what types of employees qualify for the Employee Retention Tax Credit:

Employees Who Have Been Retained Despite a Decline in Gross Receipts

The Employee Retention Tax Credit (ERTC), enacted by Congress as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, provides businesses with a payroll tax incentive for retaining economically vulnerable employees despite significant losses in gross receipts. This credit is only available to employers whose operations have been fully or partially suspended as a result of government orders during the COVID-19 pandemic, or who have experienced a significant decline in gross receipts from one quarter of 2020 compared to the same quarter in 2019.

Eligible employees are those who have been retained despite these cuts in revenue and still perform duties related to their employment. To qualify for the ERTC, both part-time and full-time employees must be paid at least $10,000 between March 12, 2020, and December 31, 2020.

The ERTC offers employers refunds of up to 50% of qualified wages up to $10,000 per employee for employee wages paid between March 12, 2020 and January 1st 2021. This credit is calculated based on eligible wages paid per quarter by each employer subject to FICA taxes and is capped at certain limits based on specific criteria such as average number of employees before February 15th 2020.

Employees Who Have Been Paid at Least $10,000 in Qualified Wages

Under the rules of the Employee Retention Tax Credit, all employees of an eligible employer who were paid at least $10,000 in qualified wages during 2020 are potentially eligible to receive a credit. Qualifying wages are wages or compensation paid after March 12, 2020 and before January 1, 2021 to employees for performing services for an eligible employer.

For most employers these qualified wages will include most of their wage and salary payments made during 2020. However, there are some exceptions, as explained in IRS guidance. Qualified wages will not generally include:

  • Payments for services that do not occur on within the calendar year beginning after March 12, 2020 and ending before January 1, 2021;
  • Payments made to any independent contractor; and
  • Payments that either don’t require the filing of Form W-2 or otherwise don’t constitute wages subject to taxes withheld by the employer (e.g., health reimbursement arrangements).

In addition to meeting the “at least $10,000 over 2020” requirements as mentioned above, employers also need to meet certain other eligibility requirements such as meeting established revenue loss thresholds in order to qualify for the tax credit. Eligible employers should consult their tax advisors for more information on their specific business operations and how they can qualify for the Employee Retention Tax Credit.

Calculating the Credit

The Employee Retention Tax Credit (ERTC) is a tax incentive designed to help employers keep employees on their payroll during the COVID-19 pandemic. To qualify for this credit, employers must meet certain requirements and calculate their credit amount with care.

This section will discuss how to calculate the credit and the factors that go into the calculation:

Calculating the Credit Amount

The employee retention tax credit (ERTC) is a refundable tax credit that employers can claim to offset the cost of continuing to pay employees during the coronavirus (COVID-19) pandemic. The amount of the tax credit depends on several factors, including:

  • The number of employees retained in 2020
  • The amounts paid or incurred for wages or salaries
  • The average number of full-time equivalent employees in 2019

To calculate the ERTC amount, employers must first determine their “eligible wages” for the quarter. Eligible wages are the total amounts paid or incurred for an employee’s “qualifying wages” – wages paid during a shutdown period due to orders from a governmental authority limiting commerce, travel, or group meetings – up to $10,000 per employee in 2020. Qualifying wages are capped at $10,000 each from March 13th through December 31st. This limit applies to 2020 only – it will rise to $10,800 in 2021 and $12,500 per employee by 2022.

After determining eligible wages employers must then compute their eligible wage base and employe base figures. For employers whose 2019 average number of full-time equivalent employees is more than 100, the eligible wage base is limited to 50 percent of their 2019 employer payroll costs up to an annual taxable wage limit set by Congress; generally this limit is around $3 million but was temporarily increased by relief legislation related Eligible Wage Base = (Eligible Wages / 2) + 50% of Wages Over $10k*. Employe Base = Average Number Of Full-time Employees For 2019 x 2.

The full ERTC amount can then be calculated: ERTC Amount = Eligible Wages x 70% x Applicable Credit Rate where applicable rates range from 50% for those employing over 100 FTEs and 70% for those employing fewer than 100 FTEs.

Calculating the Credit Period

The Employee Retention Tax Credit (ERTC) is a federal program designed to help employers offset the costs of retaining their employees during the COVID-19 pandemic. U.S. businesses and certain tax-exempt organizations that have been negatively impacted by the coronavirus pandemic may be eligible for the credit, which was made available through the CARES Act (Coronavirus Aid, Relief, and Economic Security Act).

The credit period for calculating an employer’s ERTC starts on March 13th, 2020 and ends December 31st, 2020. Qualified wages paid after December 31st, 2020 do not qualify for the ERTC. The formulas used to calculate the credit are somewhat complex and depend on a variety of factors such as past year employment levels and wages paid in 2020.

The methods for calculating this tax credit are broken down into two categories based on an employer’s pre-pandemic employee size:

  • employers with greater than 100 full-time employees in 2019
  • employers with 100 or fewer full-time employees in 2019

The formula and calculation method used to determine an employer’s credit amount differs depending on these criteria. Employers eligible for this program should consult their accountant or other financial adviser when determining their allotted amount of the Employee Retention Tax Credit.

Claiming the Credit

The Employee Retention Tax Credit is a tax incentive available to businesses to help them keep and pay their employees during the pandemic. The credit is available to businesses that have experienced a significant decline in gross receipts during the period between March 12, 2020 and December 31, 2020.

In order to qualify for the credit, businesses must meet certain criteria. We’ll take a look at what it takes to claim the credit in this section:

Filing Form 941

To claim the credit on Form 941, employers should complete Form 941 with the applicable credit added to their quarterly employment tax deposits. The credits are refundable, meaning that employers can receive payments even if no tax deposits are due for the current period. Before an employer can file a claim for the credit, however, certain eligibility requirements must be met.

To establish eligibility and determine the amount of your credit, you must have already filed Forms 941 for all relevant calendar quarters occurring after March 12, 2020 and before December 31, 2020. Additionally, you must have either experienced a full or partial suspension of operations as a result of orders from an appropriate governmental authority due to COVID-19; or experienced a significant decline in gross receipts when comparing Q1 2021 gross receipts to Q4 2020 gross receipts. Furthermore, don’t forget that any wages used to calculate the Work Opportunity Tax Credit will not be eligible for the ERTC.

If an employer meets all eligibility requirements described above and is expecting to receive payment soon after filing Form 941 with its appropriate credit adjustment, this could help alleviate some financial stressors caused by COVID-19 disruption.

Filing Form 965-C

Form 965-C is one of several tools the Internal Revenue Service (IRS) provides to business owners in order to determine their eligibility for the Employee Retention Tax Credit (ERTC). To file Form 965-C, all business owners must first have a properly completed and filed Form 941 (Employer Annual Federal Tax Return) or Form 944, Employer’s Quarterly Federal Tax Return.

Form 965-C is required if any part of your business includes corporate reorganizations or transfers, such as when businesses merge, acquire securities, acquire assets through liquidation, restructure debt or issue stock options. This form can also be submitted when there are changes in ownership due to disposition of stock. The form asks for information regarding the company’s structure and activities that resulted from the taxable event under consideration.

Businesses must provide details about any corporate reorganizations or transfers from both before and after January 1 of 2020 in order to be eligible for the Employee Retention Tax Credit. This could include information about a sale of stock ownership interest and should also cover any liquidations that took place during that time period as well as any restructuring activity. An accurate and complete Form 965-C will provide documentation that shows how a qualified business was impacted by the financial downturn related to COVID-19 in 2020.