The Employee Retention Credit (ERTC) is a tax incentive designed to encourage businesses to retain employees during economically tough times such as during COVID-19 pandemic outbreak. This article will detail how to apply for ERTC, while giving an in-depth overview of its requirements, application process, qualifying wages benefits challenges frequent asked questions (FAQs), limitations and frequent asked questions (FAQs).
Overview of Retention Credit Requirements for Employees
The Employee Retention Credit (ERTC) was first made available as part of the CARES Act in March 2020, designed to assist businesses in keeping employees on payroll during COVID-19 pandemic. To be eligible for this credit, employers must meet specific criteria.
First and foremost, they must have experienced a substantial drop in gross receipts, defined as at least 50% decrease from their prior-year’s same quarter gross receipts due to COVID-19 pandemic-related activities or orders issued by government authorities.
Employers that meet either of these criteria could qualify for the ERTC. The credit applies to wages paid out due to COVID disruptions; larger businesses can claim this credit on wages paid to employees who do not provide services as a result, while smaller enterprises may claim this credit on all wages paid regardless of whether employees provided services.
The credit amount depends on the qualified wages paid per employee per quarter, with employers eligible to claim 70% of up to $10,000 of qualified wages paid per employee per quarter – for an employee this equates to an maximum credit per employee of $7,000 in any quarter. Employers can claim this credit on their quarterly employment tax returns, with any excess credits returned directly back to them.
Be mindful that employers claiming the Earned Revenue Credit cannot use it for wages that were used to claim Paycheck Protection Program loan forgiveness and it is not available to government entities or organizations that received an American Rescue Plan Act shuttered venue grant.
The ERTC is set to expire on December 31, 2021; however, it has been extended numerous times and may continue. Employers should consult their tax advisors in order to ascertain their eligibility and claim the credit.
Follow These 5 Steps to Claim Employee Retention Credit
The Employee Retention Credit (ERTC), introduced as part of the CARES Act to provide businesses impacted by COVID-19 with financial relief, can help keep employees on payroll and prevent unnecessary layoffs. Here’s how you can apply for it:
Determine Eligibility: In order to be eligible for ERTC benefits, your business must have experienced either a substantial decline in gross receipts or have been fully or partially suspended as per government orders. Furthermore, wages paid between March 13 and December 31, 2021 qualify for this credit.
Calculate Your Credit: Once your business has qualified for ERTC, the next step should be identifying how much qualified wages qualify as eligible wages that the credit can be claimed against. Credit amounts depend on percentage and wage limits: in 2020 the ERTC equals 50% of qualified wages up to $10,000 per employee while for 2021 it increases to 70% of qualified wages up to $10,000 per employee per quarter.
Claim the Credit: To claim the ERTC, use IRS Form 941 Employer’s Quarterly Federal Tax Return or file an amended return if claiming retroactively. You can request advance payments of your ERTC using Form 7200 Advance Payment of Employer Credits Due to COVID-19; it should be noted however, that both programs cannot be claimed at once for wages that qualify under both programs.
Maintain Documents: Keeping records of qualified wages, payments to employees and any documentation related to COVID-related business disruptions as well as calculations used to establish your credit amount is of vital importance in supporting and defending against audits of any kind.
Internal Revenue Service (IRS) offers comprehensive guidance on their website, so it is wise to consult a tax professional to ensure compliance and accurate calculations. Furthermore, staying up-to-date with changes to ERTC as the pandemic develops is vitally important to any successful business across the nation.
If you have questions or require guidance regarding the ERTC, do not hesitate to reach out for help from either the IRS or an experienced tax professional. By taking advantage of this credit, you can help support your business while keeping employees employed during challenging economic conditions.
What Are Qualifying Wages for an Employee Retention Credit?
The Employee Retention Credit is a tax incentive available to businesses impacted by COVID-19 pandemic. It’s designed to encourage them to keep employees on payroll even during times of economic instability.
Although this credit can be an invaluable asset to businesses, identifying eligible wages can be challenging. Here is an in-depth look at what criteria qualify as wages:
“Qualified wages” refers to wages subject to income tax withholding and any employee compensation subject to the Railroad Retirement Tax Act, in addition to group health plan costs that correspond directly with wages earned.
Large firms with more than 100 employees qualify their wages under COVID-19 as qualified wages only when employees are no longer providing services due to adverse business conditions, meaning if an employee can work remotely or has been assigned another role they may no longer qualify for the tax credit.
Smaller businesses, on the other hand, may treat all wages paid to employees as qualified wages regardless of whether they performed services during that period. This could prove particularly advantageous to companies affected by pandemic outbreak who have had to reduce staff or hours due to illness outbreak.
Be mindful that qualifying for this credit involves meeting other criteria as well, including experiencing a significant drop in gross receipts; but understanding which wages qualify for this tax credit can provide an early indicator as to whether your business qualifies.
if your business is uncertain of its eligibility for the Employee Retention Credit, consulting with a tax professional may be beneficial in helping navigate its complex rules and regulations, and ensure you’re taking advantage of all available benefits.
IRS Employee Retention Credit Checks
As part of its efforts to ensure compliance and proper utilization of the ERTC, the IRS may conduct checks or audits. As an employer, it’s vitally important that accurate records related to this credit be kept, including employee wage records, proof of disruptions or suspension, calculations used to calculate it and any calculations done using any calculations used by IRS auditors; having these readily available will allow a smooth audit or inquiry from them and will avoid penalties or fines being assessed by them.
- Benefits of Employee Retention Credit
Financial Support: The ERTC offers employers financial relief by offsetting payroll tax liabilities, which helps maintain liquidity during difficult economic conditions.
Employee Retention: By incentivizing businesses to continue paying employees during times of economic distress, this credit encourages employers to keep paying workers and thus maintains a stable workforce during this crisis.
Economic Stability: By helping prevent large-scale job losses, the ERTC contributes to overall economic stability and promotes quicker recoveries when market conditions improve.
Flexibility: The ERTC provides its services to businesses and non-profit organizations of various kinds, making it accessible to a diverse group of employers.
Retroactivity: Even businesses that did not initially claim or know about their eligibility can still claim an ERTC retroactively, providing potential tax savings for those eligible.
Employee Retention Credit Application Challenges
Though ERTCs offer employers many benefits, their application and understanding eligibility criteria may present obstacles. Some issues employers may experience include:
Calculations is often complex: Calculating an appropriate credit amount based on qualified wages and employee count may prove challenging for businesses with seasonal workers or fluctuating staff levels.
Recordkeeping: Upholding accurate documentation and records related to an ERTC can be both tedious and time consuming.
Amending Returns: Employers needing to retroactively claim the credit will need to file amended tax returns, which could require extra time and effort on their part.
Interaction with Other Aid Programs: Employers should carefully consider which program best suits their needs and circumstances when choosing between ERTC and other pandemic relief provisions, such as Paycheck Protection Program (PPP).
FAQs About Employee Retention Credit
Q: Can businesses that received PPP loans also claim ERTC grants? A: Businesses receiving PPP loans can claim ERTC grants; however, any wages claimed for ERTC use should not have been used to forgive PPP loan balances. Employers should ensure any earnings claimed as ERTC allowance are not used towards loan forgiveness obligations.
Q: How does the ERTC interact with other tax credits, like Work Opportunity Tax Credit (WOTC)?
A: Employers that claim another employment tax credit such as WOTC cannot claim both credits at once; rather they must determine which credit will provide maximum savings and claim only that credit.
Q: Can the Earned Retention Credit (ERTC) be claimed for wages paid to owners or relatives of owners?
A: Wages paid to certain related individuals such as business owners and their relatives typically aren’t eligible for ERTC claims.
What Are the Limitations of an Employee Retention Credit?
Although an ERTC can provide numerous advantages to employers, there may also be certain limitations and potential drawbacks they should take into account:
Restrictions on Other Assist Programs: Employers receiving funds such as PPP loans should take note of potential overlaps or restrictions between programs they receive relief through.
Eligibility Requirements: Some employers may not meet the stringent eligibility requirements, such as experiencing a significant decline in gross receipts or having their operations suspended due to government orders.
Temporary Relief: The ERTC is intended as temporary tax relief; thus it will no longer provide long-term financial support to employers once the pandemic stabilizes and economies recover. Over time, its importance will dwindle.
At its heart, the Employee Retention Credit can offer much-needed financial relief to businesses affected by COVID-19 pandemic. But successfully claiming and benefitting from it requires understanding its complexities, overcoming application obstacles and maintaining accurate documentation – these factors all play a part in making ERTC successful and worthwhile for claiming businesses.
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.