Summary
Summary: The Employee Retention Credit (ERC) is a refundable tax credit introduced by the CARES Act to encourage eligible employers to keep employees on their payroll during the COVID-19 pandemic. This credit is available for qualified wages paid after March 12, 2020, and before January 1, 2022. The maximum credit amount available is $5,000 per employee for the entire credit period. In this article, we'll cover everything you need to know about filing for ERC, including eligibility requirements, qualifying wages, and the application process.
What is the Employee Retention Credit (ERC)?
The Employee Retention Credit (ERC) is a tax credit provided to employers for retaining their employees during the COVID-19 pandemic. It encourages businesses to keep their workers despite the economic downturn brought about by the pandemic. The ERC was included in the CARES Act and was expanded by the Consolidated Appropriations Act, 2021.
To be eligible for the ERC, businesses must have been required to suspend some or all operations due to COVID-19 government restrictions or have entities that lost 50% of their gross receipts from the same quarter of the previous year.
The ERC is a refundable tax credit, which means that if the credit exceeds the employer's payroll tax liability, the excess is refunded back to the employer. The maximum credit per employee is $5,000 for 2020 and $7,000 per employee per quarter for 2021.
Business owners can claim the ERC by offsetting their payroll taxes. Eligible wages include qualified health plan expenses and payroll costs, such as compensation, taxable social security wages, and Medicare wages.
The ERC can be claimed on quarterly tax returns or on amended federal tax returns. Employers can also receive advance payments of the credit by reducing their employment tax deposits in anticipation. The statute of limitations for claiming the ERC is generally three years from the time that the original tax return was filed.
Overall, the Employee Retention Credit provides valuable support to businesses during these challenging times and can help lower the tax burdens for employers who meet the eligibility requirements.
Eligible Employers and Employees
The Employee Retention Credit (ERC) is a valuable resource for eligible employers during the COVID-19 pandemic. To qualify for the credit, businesses must meet specific eligibility requirements and employ eligible employees. In this article, we'll outline everything you need to know about eligible employers and employees for the ERC, including what qualifies as an eligible employer, what constitutes an eligible employee, and how to claim the credit on your federal tax return.
Who is Eligible for the ERC?
The Employee Retention Credit (ERC) was introduced as a refundable tax credit under the CARES Act to encourage eligible employers to retain their workforce during the COVID-19 pandemic. Not all businesses qualify for this credit, however. An eligible employer must meet specific criteria to qualify for the ERC.
To be eligible, a business must have been wholly or partially impacted by the COVID-19 pandemic and must meet at least one of the following criteria:
- Experience a full or partial suspension of operations as a result of a government mandate due to COVID-19
- Demonstrates at least a 50% decline in gross receipts for the same quarter in the previous year
- Experience a partial suspension of operations as a result of a government mandate
- Demonstrates at least a 20% decline in gross receipts for the same quarter in the previous year (from January 1, 2021, to June 30, 2021)
The qualifying events for an ERC-eligible employer include temporary shutdowns, facility closures, reduced operating hours, and other emergencies like shelter-in-place orders, curfews, and capacity restrictions. To claim the credit, employers must demonstrate that they were impacted by one of these qualifying events.
In summary, eligible employers must demonstrate a decline in gross receipts of at least 20% (for the first half of 2021) or 50% (for the same quarter in the previous year) and be impacted by a qualifying event. By meeting these qualifying criteria, businesses can claim the ERC as a refundable tax credit against their payroll taxes, up to a maximum of $7,000 per full-time employee per quarter.
How Can an Employer Claim the Credit?
To claim the Employee Retention Credit (ERC), eligible employers must follow the step-by-step process outlined below:
1. Determine Eligibility: Employers must first determine if they are eligible for the ERC. The criteria for eligibility include the impact of the COVID-19 pandemic on the business. The business must have experienced a full or partial suspension of operations as a result of a government mandate due to COVID-19 or must have had at least a 50% decline in gross receipts for the same quarter in the previous year. Other criteria may apply, so employers should consult the guidance provided by the IRS.
2. Identify Qualified Wages: Employers must identify qualified wages paid during the qualifying period, which spans from March 13, 2020 to December 31, 2021. Qualified wages include wages and compensation paid to employees for services performed during the qualifying period, healthcare plan expenses, and employer-paid Social Security and Medicare taxes. The wages paid to each employee are capped at $10,000 per quarter.
3. Calculate the Credit: Once the eligible employer has identified their qualified wages for the qualifying period, they must calculate the amount of the credit. The ERC is a refundable tax credit equal to 70% of qualified wages, including healthcare plan expenses, paid to employees between March 13, 2020, and December 31, 2021.
4. File Form 941: Eligible employers must report their ERC on their quarterly employment tax returns by filing Form 941. On line 11c, employers should include the amount of the ERC. The amount of the credit should also be reported on line 13i. If the amount of the ERC exceeds the payroll taxes owed for the quarter, the employer may request a refund by completing Form 7200.
5. Amend Form 941X: Employers who did not claim the ERC on their original Form 941 may file an amended Form 941X to claim the credit. The deadline for filing an amended federal employment tax return is within three years of the date the original return was filed.
6. Keep Records: Employers must keep records that support the credit claimed, including the amount of qualified wages and healthcare plan expenses, and should be able to provide these records if requested by the IRS.
By following these steps, eligible employers can claim the ERC on their employment tax returns and reduce their tax burdens. It is important to note that employers should consult the guidance provided by the IRS and a tax professional to ensure compliance with the eligibility requirements and reporting procedures.
Qualified Wages and Health Expenses
Qualified wages and health expenses are crucial components for employers looking to benefit from the Employee Retention Credit (ERC). ERC is a refundable tax credit designed to help employers keep their employees on payroll during the COVID-19 pandemic. Under the program, eligible employers can claim a credit of up to 70% of qualified wages and health expenses paid to employees between March 13, 2020, and December 31, 2021. In this article, we will discuss everything you need to know about qualified wages and health expenses to help you take advantage of the ERC.
What are Qualified Wages for ERC?
If you're a business owner looking to take advantage of the Employee Retention Credit (ERC) program, understanding what qualified wages are is essential.
Qualified wages are the criteria that determine whether or not an employer is eligible to receive the ERC. To qualify as wages, payments made to employees must be subject to FICA taxes (Social Security and Medicare taxes) and must exclude any healthcare expenses paid by the employer.
Examples of qualified wages include salaries, wages, and compensation paid to employees. Additionally, the cost of qualified health plan expenses may also count toward the ERC credit.
However, not all types of wages qualify for ERC. Wages paid to related individuals are not eligible for the credit, nor are wages used to claim sick and paid leave credits under the Families First Coronavirus Response Act (FFCRA).
It's also important to note that wages used to qualify for a Paycheck Protection Program (PPP) loan cannot be counted toward the ERC credit.
In summary, qualified wages are a key factor in determining eligibility for the ERC program. To ensure that your business is eligible for the credit, be sure to keep accurate records of your employee wages and verify that they meet the requirements for qualification.
What are Qualified Health Plan Expenses for ERC?
In addition to qualified wages, employers can also include qualified health plan expenses when calculating their eligibility for the Employee Retention Credit (ERC).
Qualified health plan expenses refer to the amount paid by the employer to provide and maintain a group healthcare plan for their employees. This includes both the portion paid by the employer and the portion paid by the employee through pre-tax salary reduction contributions.
When claiming the ERC, employers can include expenses paid to provide and maintain a group healthcare plan coverage during any portion of the period for which the credit is being claimed. This corresponds with the period of wages paid to any eligible employee during that timeframe.
Including qualified health plan expenses when calculating ERC eligibility can be beneficial for businesses. By doing so, employers can increase their credit amount, ultimately reducing their overall tax burden.
In summary, qualified health plan expenses are an important factor to consider when calculating eligibility for the ERC. Employers can include both employer and employee contributions to group healthcare plans when determining the credit. This can result in a greater credit amount and lessen the tax burden on businesses.
Maximum Credits Per Employee Per Quarter
Maximum Credits Per Employee Per Quarter: How Much Can You Receive?
When calculating the Employee Retention Credit (ERC), it’s essential to know the maximum amount of qualified wages and credit you can receive per employee. For wage payments made from March 13, 2020 through December 31, 2020, the maximum credit per employee was $5,000.
However, there have been some changes made to the ERC for the year 2021. From March to December 2020, the maximum credit per employee was raised to $10,000. And from January to September 2021, the credit was lowered to $7,000 per employee per quarter.
It’s important to note that recovery startups were eligible for the same credit as from September to December 2021. This was a great relief for businesses that had suffered during the COVID-19 pandemic.
Overall, the ERC provides businesses with a refundable credit against payroll taxes and helps to offset the financial burdens caused by the pandemic. By understanding the eligibility requirements and regulations surrounding the ERC, employers can take advantage of this opportunity and provide their employees with the support they need during these trying times.
Partial Suspension of Business Operations or Significant Decline in Gross Receipts
Partial Suspension of Business Operations or Significant Decline in Gross Receipts can greatly affect a business, particularly during challenging times such as the COVID-19 pandemic. The Employee Retention Credit (ERC) was introduced as a form of relief for eligible employers who were affected by either of these circumstances. In this article, we will provide you with everything you need to know about how to file for the ERC and the eligibility requirements. We will also discuss qualifying periods, eligible wages, maximum credit, and the application process.
How to Determine a Significant Decline in Gross Receipts?
If you are an employer considering claiming the Employee Retention Credit (ERC), it is crucial to understand how to determine a significant decline in gross receipts. This metric determines whether or not your business is eligible for the credit.
According to the IRS, a significant decline in gross receipts occurs when your business's gross receipts are less than 80% of its gross receipts for the same quarter in the prior year. This means you will need to compare your current quarterly gross receipts to those from the same quarter in the previous year.
Alternatively, if your business was not in operation during the same quarter in the prior year, you can use the gross receipts of the corresponding quarter from the previous calendar quarter. For example, if your business started in Q3 of 2020, you could compare your Q3 2020 gross receipts to your Q2 2020 gross receipts.
The safe harbor provision also allows for annual comparisons of gross receipts. If your business has experienced a significant decline in annual gross receipts of at least 50% when comparing 2020 to 2019, you could potentially qualify for the ERC.
For businesses not in existence for the full year in 2019, the rules for the significant decline will apply on a calendar quarter basis. This means that your business will compare gross receipts from the current quarter to the gross receipts from the corresponding quarter in 2020.
Understanding these guidelines is crucial in determining whether or not your business is eligible for the ERC. By following the guidelines and properly calculating your gross receipts, you can maximize your potential credit and help your business recover from the economic impact of the COVID-19 pandemic.
Advance Payments of the Credit and Refundable Tax Credit
The Employee Retention Credit (ERC) is a refundable tax credit designed to help eligible employers retain their employees during the COVID-19 pandemic. This credit is available for wages paid after March 12, 2020, and before January 1, 2022. In addition to the credit per employee, the ERC also provides opportunities for Advance Payments of the Credit and Refundable Tax Credit, which we will discuss in the following sections.
Can an Employer Receive Advance Payments of the Credit?
If you're an eligible employer looking to receive the Employee Retention Credit (ERC) from the IRS, you might be wondering if you can receive advance payments of the credit. As of March 2021, employers are now able to receive advance payments of the ERC.
To be able to receive advance payments, an employer must meet certain eligibility requirements. For example, the employer must have had a full or partial suspension of their business operations during a calendar quarter due to a government mandate related to COVID-19, or they must have experienced a significant decline in gross receipts.
The maximum amount of the credit an employer can receive is 70% of qualified wages paid to full-time employees during a specific calendar quarter. Additionally, an eligible employer can apply for advance payments of the credit for the first two quarters of 2021, specifically from January through June.
To apply for advance payments, an employer must follow specific steps. Firstly, an employer must calculate the expected amount of credit for the specific quarter. Next, they must reduce any employment tax deposits for that quarter by the amount of the credit. If the credit amount is greater than the employment taxes owed for that quarter, the remaining credit can be claimed on the employer's employment tax return.
It's worth noting that if an employer applies as a recovery startup business, they are eligible to receive a maximum advance payment of $50,000 per quarter, even if the expected credit is greater. If an employer receives advance payments that exceed the amount of credit they are ultimately eligible for, then they must repay the excess.
In conclusion, eligible employers can now receive advance payments of the ERC, provided they meet the eligibility requirements and follow the correct steps to apply. It's important to stay up-to-date with the latest information from the IRS to ensure that you don't miss out on any potential advances or payments of the credit.
Is the Employee Retention Tax Credit Refundable?
Yes, the Employee Retention Tax Credit (ERTC) is refundable. It is a fully refundable tax credit for eligible employers, which means that if the amount of the credit exceeds the employer's total tax liability, the excess credit will be refunded to the employer.
This is an important aspect of the credit, as it provides additional financial relief to businesses struggling to stay afloat during the COVID-19 pandemic. Eligible employers can claim the credit on their federal tax return for 2020 or 2021, depending on the qualifying period, and receive a refund if they meet the eligibility requirements.
The ERTC is designed to encourage employers to retain their employees despite the economic challenges of the pandemic. It provides a tax credit of up to 70% of qualified wages paid to full-time employees during a specific calendar quarter, with a maximum credit of $7,000 per employee per quarter. Eligible employers include those with a full or partial suspension of their business operations due to a government mandate related to COVID-19, or those experiencing a significant decline in gross receipts.
The refundable nature of the credit makes it an especially valuable form of relief for small businesses, who may not have substantial tax liability but still need financial support to continue operations. The ERTC can help alleviate some of the tax burdens faced by eligible employers, allowing them to focus on keeping their businesses afloat and retaining their employees during these challenging times.
Recovery Startup Businesses and Payroll Taxes
Recovery startup businesses, defined as businesses that began operating after February 15, 2020, can also claim the Employee Retention Credit (ERC). The ERC is available to eligible employers who retained employees during the COVID-19 pandemic, including recovery startup businesses who may have been hit hard by the economic challenges of the pandemic.
To be eligible for the ERC, recovery startups must meet certain requirements. Specifically, they must have experienced a full or partial suspension of their operations due to a government mandate related to COVID-19 or a significant decline in gross receipts. Additionally, recovery startups must have been in operation before January 1, 2021, and have less than $1 million in gross receipts.
There are some specific guidelines and rules for recovery startups to claim the ERC. First, recovery startups can only claim the credit on qualified wages paid after March 12, 2020. Second, recovery startups who began operations during the 2020 calendar year can only include wages paid after they began operations. Finally, recovery startups should be aware that they cannot claim the ERC and the Paycheck Protection Program (PPP) loan forgiveness on the same wages.
To claim the ERC, recovery startups must file Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for the calendar quarter in which they paid qualified wages. The maximum credit recovery startups can receive per quarter is $7,000 per full-time employee. This means that a recovery startup with 10 full-time employees who paid qualified wages of $10,000 per quarter per employee can receive a maximum credit of $70,000.
One unique payroll tax consideration for recovery startups when claiming the ERC is that they can receive advance payments of the credit. Recovery startups that anticipate the credit will exceed their payroll tax liability for a quarter can take advantage of this option, allowing them to receive the credit as a refundable payroll tax credit before they file their quarterly tax return. Additionally, recovery startups should be aware of the statute of limitations for claiming the credit, which is three years from the time the tax return was filed or two years from the time the tax was paid, whichever is later.
Overall, the ERC provides critical financial relief to recovery startup businesses during the COVID-19 pandemic. As long as recovery startups meet the eligibility requirements, follow the specific guidelines and rules, and understand any unique payroll tax considerations, they can claim the credit and receive up to $7,000 per full-time employee per quarter.
