Employee Retention Credit IRS
Are You Eligible for the Retention Credit?
Overview: What is ERTC (Employee Retention Tax Credit)?
Employee Retention Tax Credit (ERTC, also called ERC or Employee Retention Credit) is a federal tax credit passed by the congress that’s available as part of the Coronavirus relief effort rewarding qualified employers who retain employees. Unlike other programs such as PPP loan, the ERTC (Employee Retention Tax Credit) rebate does not come with any restrictions on its usage and, as per recent modifications, employers may claim ERTC (Employee Retention Tax Credit) even after receiving PPP.
ERTC is a very complex topic, which most CPAs find overwhelming. It is best to talk to an experienced ERTC specialist for most accurate info. The details provided on this page may not accurately reflect your situations as it is beyond the scope of this article to cover all possible circumstances. You can begin your claim in 15 minutes by filling out a simple form at https://ertccredit.net/
Who qualifies for ERTC (Employee Retention Tax Credit)?
Following the passing of the American Rescue Plan Act, most companies, including schools, universities, hospitals, and 501(c)(3) organisations, are eligible for the credit. Previously, the Consolidated Appropriations Act broadened eligibility to include firms that received a loan via the Paycheck Protection Program (PPP), including borrowers who were previously ineligible for the tax credit.
For qualified employers, one of two variables determines qualification, and one of these characteristics must apply in the calendar quarter in which the credit is to be used:
- Due to a government order, a trade or business was entirely or partially halted or forced to decrease its hours. The credit is only valid for the portion of the quarter in which the business is closed, not for the whole quarter.
According to IRS advice, certain firms do not fulfill this factor test and hence are not deemed as qualified.
Those deemed vital, unless their supply of crucial materials/goods is disrupted in a way that makes it impossible for them to continue operating.
Businesses that were forced to close yet were able to keep their operations mostly intact because to telework.
The second factor test, however, may still qualify any of these enterprises for loans.
2. An employer whose gross earnings have dropped significantly.
The IRS issued Revenue Procedure 2021-33 on Tuesday, Aug. 10, 2021, which establishes a safe harbour under which an employer may exclude the amount of a PPP loan forgiveness and the amount of a Shuttered Venue Operators Grant or a Restaurant Revitalization Fund grant from gross revenue solely for the purpose of determining eligibility to claim the ERTC (Employee Retention Tax Credit). Businesses must apply the safe harbour to all of their organisations uniformly.
How to Qualify as an Eligible Employer
The time period in question determines whether you are a “qualifying employer.”
You must have operated on a trade or business, or been a tax-exempt organisation, from March 13, 2020, to December 31, 2020.
- Due to COVID-19 directives from a relevant governmental body, was partially or completely suspended.
- A large drop in gross receipts occurred, defined as less than 50% of gross receipts for the same calendar quarter in 2019.
- The 2020 ERTC (Employee Retention Tax Credit) excludes government and state entities, as well as political subdivisions.
- You are not entitled for the 2020 ERTC (Employee Retention Tax Credit) for your own salary if you were self-employed. However, if you employed others, you may be qualified for the ERTC (Employee Retention Tax Credit) earnings paid to those workers.
You must have operated on a trade or business or been a tax-exempt organisation that:3 from January 1, 2021, to June 30, 2021.
- Due to COVID-19 directives from a relevant governmental body, was partially or completely suspended.
- A large drop in gross receipts occurred, defined as less than 80% of gross receipts for the same calendar quarter in 2019.
- You can use 2020 as a reference year if you were not in business in 2019.
- The 2021 ERTC (Employee Retention Tax Credit) excludes government and state businesses and political subdivisions; nevertheless, tax-exempt public colleges, universities, and hospitals are eligible.
- You are not eligible for the 2021 ERTC (Employee Retention Tax Credit) for your own salary if you are self-employed. However, if you hire others, you may be eligible for the ERTC (Employee Retention Tax Credit) earnings given to those workers.
Other Qualification Standards
- Qualified wages paid for which you earned a tax credit under the Families First Coronavirus Response Act for paid sick and family leave (Phase II)
- Any salaries you used to calculate the credit for paid family and medical leave under Internal Revenue Code Section 45S
- Qualified wages paid to certain family members
- Any employee for whom you received a Work Opportunity Tax Credit under Internal Revenue Code Section 51
Find out your eligibility by filling out a simple form on https://ertccredit.net/
Calculation of the Credit
What wages paid qualify for the credit?
In order to qualify for the employee retention tax credit, employers must pay qualifed wages according to strict rules. The wages paid must be paid to employees who are on the payroll on December 31st of the year in which the credit is claimed. The credit is available to employers who have maintained at least 50% of their workforce from December 31st of the previous year. To claim the credit, employers must file Form 944 or Form 940 by January 31st of the following year.
The amount of the wage credit is $1,000 per employee. However, the total amount of credits that can be claimed by an employer is $500,000. The credit is available for each qualified employee who has been employed for at least one year and is not based on hours worked.
The ceiling for 2021 has been raised to 500 full-time employees, meaning if you employed more than 500 people, you may only claim the ERTC (Employee Retention Tax Credit) those that do not provide services. If your company has 500 or fewer employees, you may claim the credit for them all, regardless of their working status.
How are tipped wages handled?
In order to be able to take advantage of the employee retention tax credit, employers must ensure that they are handling tipped wages in the correct way. The credit is calculated based on how much of an employee’s wages are made up of tips. Any tips that are not reported to the employer will not be counted when calculating the credit. This means that it is important for employers to keep track of all tips received by their employees.
Tips would be included in qualifying wages if they were liable to FICA, according to the IRS. In general, if an employee receives more than $20 in tips in a calendar month, all tips (including the first $20) are considered qualifying earnings for the purpose of the retention credit. Tips of less than $20 per month are not taxable to FICA and are not eligible for the retention credit.
Amount of the Credit for 2020
For all eligible calendar quarters beginning March 13, 2020, and ending December 31, 2020, the credit is equivalent to 50% of up to $10,000 in qualified earnings (including amounts paid toward health insurance) per full-time employee. For the term, this equates to a maximum credit of $5,000 per employee.
A qualifying period begins in any quarter in which gross receipts are less than 50% of gross receipts for the same quarter in 2019 and ends at the start of the first calendar quarter after the first quarter in which gross receipts are more than 80% of gross receipts for that quarter in 2019.
Amount of the Credit for 2021
For each eligible calendar quarter beginning Jan. 1, 2021, and ending June 30, 2021, the credit is equivalent to 70% of up to $10,000 in qualified earnings (including amounts paid toward health insurance) per full-time employee. For the time, this equates to a maximum credit of $14,000 per employee ($7,000 each quarter).
The credit is entirely refundable and is applied to your part of the employee’s Social Security taxes. This implies that the credit will be treated as an overpayment, with your portion of the taxes deducted and repaid to you. Based on two eligible quarters, the table below shows your payroll expenditures for one full-time employee (the word “employee” encompasses full-time, part-time, or other basis) for the first half of 2021. Because other expenditures are unaffected, the chart solely lists FICA taxes as a cost.
How to Get the ERTC (Employee Retention Tax Credit) for Wages Paid in Q4 2020
The ERTC (Employee Retention Tax Credit) filing process for Q4 2020 pay is virtually the same as it is for the entire year of 2020. Calculate your credit for Q4 2020 and deduct it from your deposit on Form 941, Employer’s Quarterly Federal Tax Return.
How to Get the ERTC (Employee Retention Tax Credit) for Unforgiven PPP Loan
Originally, employers had to choose between ERTC (Employee Retention Tax Credit) and PPP. However, under the newer modifications, employers are now able to claim the ERTC (Employee Retention Tax Credit) in addition to the PPP loan. The fact that you took out a PPP loan does not stop you from claiming the ERTC (Employee Retention Tax Credit) for eligible earnings that were not recognised as payroll expenditures in order to get your PPP debt forgiven in full or in part.
Because time is of the essence, if you want to adopt this method, enter the ERTC (Employee Retention Tax Credit) attributable to Q2 or Q3 qualified wages paid and health expenditures on line 11c or line 13d of your original Q4 2020 Form 941, together with qualified wages received in Q4. The IRS website has comprehensive and clear instructions.
Alternatively, you can use Form 941-X to file an amended return or a refund claim for the quarter to which the extra ERTC (Employee Retention Tax Credit) applies.
How to Get the ERTC (Employee Retention Tax Credit) for Wages Paid in 2021
The method for acquiring the ERTC (Employee Retention Tax Credit) in 2021 should be identical to that described above for 2020. Remember to include in the CAA’s modifications, which are detailed above.
You may also get your ERTC (Employee Retention Tax Credit) for Q1 and Q2 of 2021 by decreasing your employment tax contributions, exactly like in 2020. You can seek early payment of the credit using Form 7200, Advance of Employer Credits Due to COVID-19, if you qualify as a small employer (500 or fewer full-time workers in 2019). Employers with more than 500 workers will not be eligible for increases after 2021.
How can businesses claim ERTC (Employee Retention Tax Credit) retroactively?
To claim the ERTC (Employee Retention Tax Credit), businesses must file Form 941-x, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. The form must be filed within 3 years of the quarter in which the employees were retained. For example, if a business retained employees in Quarter 4 of 2016, the Form 941-x must be filed by December 31, 2019.
Exceptions and special cases
There are different sets of rules applied to more specialized cases such as startups and non profits. It is best to talk to your ERTC (Employee Retention Tax Credit) specialist to get an accurate idea of eligibility and qualifications.