In this article, we’ll investigate the Employee Retention Credit (ERTC), a refundable tax credit designed to encourage businesses to retain employees during uncertain economic times. We’ll explain what this refundable tax credit entails as well as its eligibility criteria, the calculation process for qualified wages, claiming the credit, and Form 941-X’s role in this process – not forgetting whether family members of business owners may also claim ERTC.
What Is an Employee Retention Credit?
The Employee Retention Credit is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced in March 2020 and expanded upon in December 2020 by both Consolidated Appropriations Act and American Rescue Plan Act (ARPA). The ERTC’s purpose is to assist businesses impacted by COVID-19 pandemic keep employees on payroll while still operating and ultimately recovering from this crisis.
This credit is refundable for a certain percentage of qualified wages paid to employees of eligible employers, and should be claimed on their federal employment tax returns to reduce overall taxes due to the Internal Revenue Service (IRS).
How Does Employee Retention Credit Work?
Employers eligible to claim the Employee Retention Credit are those whose gross receipts have experienced a substantial decline or were required to fully or partially cease operations due to COVID-19. This credit equals 50% of qualifying wages paid out during each calendar quarter up to an individual limit of $10,000; which equates to maximum quarterly credit of $5,000 per employee.
Qualified wages include employee wages and compensation as well as qualified health plan expenses; however, the credit cannot be claimed on wages paid using foregone Paycheck Protection Program loan proceeds.
Employers can claim this credit on Form 941 when paying wages between March 13, 2020, and December 31st 2021. Any excess credits are returned back to them if their total liability for federal employment taxes has exceeded what has been earned as tax credits.
Who Is Eligible for an Employee Retention Credit?
Employers that qualify as eligible employers include those that experienced either a significant drop in gross receipts or were forced to completely or partially suspend operations as a result of COVID-19. Employers with 500 full-time employees or less could claim the credit on all wages paid during 2019; those employing over 500 full-time staff could only claim it on those not providing services as a result of COVID-19 related circumstances.
Self-employed individuals may qualify for the credit if they meet certain criteria. These include having experienced either a substantial decrease in gross receipts due to COVID-19-related circumstances or being unable to perform services due to its implementation; as well as having one or more qualifying businesses partially or fully suspended as a result.
How to Calculate Qualified Wages for Employee Retention Credit
Who Is Eligible for Employee Retention Credit?
To qualify for the Employee Retention Credit (ERTC), employers must meet one or more of the following criteria.
Have taken steps to limit COVID-19 pandemic-related operations by fully or partially suspending operations.
Experienced a significant decline in gross receipts, defined as at least 50% or 20% when compared to the same quarter in previous calendar years.
ERTC Credit eligibility extends to tax-exempt organizations as well as tax-payers; specific rules apply for government employers and tribal entities, while self-employed individuals cannot claim it for themselves but can claim it on wages paid out to employees.
Are You Wondering If Your Business Qualifies for an Employment Related Credit (ERTC)? Don’t panic; the IRS provides guidance to assist employers in assessing eligibility. If in doubt, seek assistance from a tax professional as they will know all of the rules and regulations surrounding the ERTC credit.
What Are Qualified Wages (QWs)
QWs refer to any wages paid to employees during periods when an employer is eligible for ERTC tax credits; this can include wages, tips, and certain health plan expenses. Qualified wages differ depending on the size of an employer: the definition will change accordingly.
Employers with 100 or fewer full-time employees in 2020 and 500 or fewer in 2021 qualify all wages paid during an eligible period as qualified wages.
Employers with over 100 full-time employees in 2020 or 500 in 2021 who pay qualified wages include those that compensate employees not providing services due to operations being suspended or gross receipts declining as discussed above.
In 2020 and 2021, the maximum qualified wages that can be counted toward this credit are $10k per employee in terms of wages that qualify.
Note: Not all wages paid during an eligible period qualify for this credit. In particular, wages paid to family members of an employer may not qualify; additionally, wages paid to employees related to or owning significant portions of a business may come under additional IRS scrutiny.
Employers should maintain accurate records of all wages paid during an eligible period, including documentation as to why certain employees did not provide services during that time.
If you are considering filing for the ERTC, now is the time to act. With its expiry looming at the end of 2021, eligible employers should act promptly in order to take full advantage of this tax break.
How Can I Claim the Employee Retention Credit
Are You an Employer Looking to Claim the Employee Retention Credit (ERTC)? The ERTC is a refundable tax credit designed to encourage businesses to retain employees during the COVID-19 Pandemic and keep them on payroll. Here’s our step-by-step guide on How to Claim it
Step 1: Assess Your Eligibility
Before filing an ERTC claim, it’s essential to establish your eligibility. Typically, businesses experiencing significant decline in gross receipts or having been ordered to suspend operations by government orders are eligible for this credit; however there may be restrictions and limitations that apply, so it is vitally important that you follow all IRS guidelines closely when filing.
Step 2: Calculate Your Loan Amount
ERTC credits are equal to 50% of wages paid between March 12, 2020, and December 31, 2021 that qualified employees received, up to $5,000 per employee. To calculate your credit amount, simply identify all qualified employees during this eligible period as well as determine total qualified wages paid out during that timeframe.
Step 3: Submit Form 941
Employers claim their ERTC by filing Form 941, Employer’s Quarterly Federal Tax Return. In addition to your payroll taxes and ERTC calculations, be sure to include information regarding any credits or adjustments applicable for ERTC calculation on Form 941.
Step 4: Wait For Refund or Transfer Forward.
Employer Social Security tax credits can be applied against employer Social Security taxes, with any excess being either refunded back to you or carried forward to offset future employment tax liabilities. Refunds typically arrive 2-4 weeks after filing your return; for those carrying forward the credit, make sure accurate records are kept of calculations and carryforward amounts.
Claiming an ERTC may be a complex process, but it can provide significant financial relief to eligible businesses. If you require assistance or have questions about eligibility for this rebate program, consult with a tax professional or contact the IRS directly for guidance.
What is Form 941-X for Employee Retention Credit?
Form 941-X is an Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, used to correct errors on previously filed Forms 941. Employers who discover discrepancies after submitting employment tax returns can use Form 941-X to make necessary corrections or claim refunds from previously submitted returns.
Employers claiming Employee Retention Credit (ERTC) who have identified additional qualified wages that qualify them for a higher credit amount can file Form 941-X to request an adjustment or refund of taxes overpaid in connection with ERTC. This may be especially applicable if their businesses were affected by COVID-19 pandemic and had to close or experienced significant reduction in gross receipts.
The Employer Retention Credit (ERTC) was implemented as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 to encourage employers to keep employees on payroll during a pandemic; its value equals 50% of qualified wages paid per employee up to a quarterly maximum cap.
Qualified wages refers to wages and compensation paid between March 13, 2020, and December 31st of 2021, paid to employees by eligible employers who experienced full or partial suspension due to government orders related to COVID-19 or had significant decrease in gross receipts compared with same quarter from prior year.
Employers who initially claimed the ERTC on Form 941 but later identified additional qualified wages can file Form 941-X to claim additional credits. It should be filed within three years from when Form 941 was first submitted, so employers must maintain accurate records regarding qualified wages as well as consult a tax professional to ensure they claim the correct amount of ERTC.
Form 941-X can be an invaluable asset for employers needing to correct errors or file refund claims on their employment tax returns. When used in conjunction with ERTC credits and overpayments, Form 941-X provides employers with additional credits or reimbursement of overpaid taxes. As the pandemic impacts businesses further, employers should stay aware of available tax credits and incentives available to them.
Can family members of business owners qualify for the ERTC Credit?
According to the IRS, wages paid to certain family members of business owners do not qualify as qualified wages for the Employee Retention Credit (ERTC). This is because its purpose is to encourage employers to retain employees on payroll rather than reward employers for employing family members as employees.
Family members that do not qualify are: children or their direct descendants, siblings, stepbrothers or stepsisters of any sort; fathers and mothers (or ancestors thereof), stepfathers or stepmothers, nieces or nephews, aunts or uncles as well as sons-in-law, daughters-in-law, fathers-in-law, mothers-in-law, brothers-in-law or sisters-in-law.
Note that family members may not qualify for ERTC benefits; however, other employees could. Eligible employees must have been employed by their employers during the applicable time period and experienced either decreased hours or wages as a result of COVID-19 pandemic.
Employers should understand both the eligibility criteria for ERTC as well as its calculation and claim process in order to claim this credit effectively. Credit amounts are calculated using a percentage of qualified wages paid out during each applicable time period; employers can claim them through quarterly employment tax returns or request advance payments of this credit from the IRS.
Understanding and claiming an Employee Retention Credit can greatly assist businesses affected by the COVID-19 pandemic. Employers should carefully consider eligibility criteria, qualified wages and compliant methods of claiming the ERTC so as to receive its appropriate credits in order to retain workforces and sustain operations during challenging times – this way businesses will not only survive but flourish even during trying circumstances.
About the Author
Richard Caldwell is a highly experienced tax professional specializing in the Employee Retention Tax Credit (ERTC) for business owners. With an impressive background in taxation law and accounting, Richard has consistently demonstrated his dedication to helping businesses navigate the complexities of tax regulations, ensuring they receive the maximum benefits available to them.