Understanding the Employee Retention Tax Credit for HR Companies
As the pandemic continues to impact businesses, HR companies are looking for ways to retain their employees. One option that many might not be aware of is the Employee Retention Tax Credit (ERTC). This tax credit was created to help businesses recover from the pandemic by providing financial assistance to those that retained their employees during this difficult time.
The ERTC is a refundable tax credit of up to 70% of qualified wages paid by eligible employers to employees between March 13, 2020, and September 30, 2021. Businesses of all sizes and across all industries qualify for the ERTC if they experienced full or partial suspension of business operations in 2020 or 2021 because of COVID-19-related government restrictions on commerce, gatherings, or travel, or a significant decline in gross receipts.
To help HR companies understand the ERTC and how it can benefit them, we will discuss what the ERTC is, how it works, the benefits of ERTC for HR companies, and how to maximize the ERTC.
What is the Employee Retention Tax Credit for HR Companies?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit of up to 70% of qualified wages paid by eligible employers to employees between March 13, 2020, and September 30, 2021. The program expired in November 2021, but businesses can still retroactively claim ERC for up to three years by amending their 2020 or 2021 tax returns.
Eligibility
Businesses of all sizes and across all industries qualify for the ERTC if they experienced full or partial suspension of business operations in 2020 or 2021 because of COVID-19-related government restrictions on commerce, gatherings, or travel, or a significant decline in gross receipts.
What expenses qualify?
Qualified wages include wages and compensation paid to employees. These include health benefits, paid time off, and retirement benefits. Qualified wages for the ERTC are wages that are subject to Social Security taxes and Medicare taxes.
How to calculate and claim the credit
The amount of the ERTC is calculated as 70% of qualified wages paid during each quarter of 2021, up to $10,000 per employee per quarter. For 2020, the maximum credit available is $5,000 per employee.
To claim the ERTC, eligible employers can offset their payroll tax liability by the amount of the credit or request an advance payment of the credit from the IRS. The credit can be claimed on Form 941, the employers quarterly federal tax return.
How Does the Employee Retention Tax Credit Work?
The ERTC is a refundable tax credit, which means that eligible employers can receive the full amount of the credit even if it exceeds their total tax liability.
Refundable tax credit
A refundable tax credit is a credit that can be claimed even if the credit exceeds the amount of taxes owed. This means that eligible employers can receive a refund from the IRS for the full amount of the credit if it exceeds their payroll tax liability.
Maximum credit amount
For 2021, the maximum credit amount is $28,000 per employee ($7,000 per quarter), and for 2020, the maximum credit amount is $5,000 per employee.
How to apply for the credit
To apply for the ERTC, eligible employers can offset their payroll tax liability by the amount of the credit or request an advance payment of the credit from the IRS. The credit can be claimed on Form 941, the employers quarterly federal tax return.
What happens if you don't use the full credit?
If the amount of the ERTC exceeds the amount of the employers payroll tax liability, the difference is treated as an overpayment and will be refunded to the employer.
Common Misconceptions about the Employee Retention Tax Credit
There are several misconceptions about the ERTC that employers should be aware of.
Misconception 1: PPP loan recipients are not eligible for the ERTC
One of the biggest misconceptions is that employers who received Paycheck Protection Program (PPP) loans are not eligible for the ERTC. While employers cannot claim the ERTC on wages that were paid for with forgiven PPP funds, they can still claim the credit on wages that were paid for with non-forgiven PPP funds.
Misconception 2: The ERTC is only available to certain industries
Another common misconception is that the ERTC is only available to certain industries. In reality, businesses of all sizes and across all industries qualify for the ERTC if they experienced full or partial suspension of business operations in 2020 or 2021 because of COVID-19-related government restrictions on commerce, gatherings, or travel, or a significant decline in gross receipts.
Misconception 3: The ERTC is not worth the effort to claim
Some employers may be under the impression that the ERTC is not worth the effort to claim. However, with the maximum credit amount of $28,000 per employee for 2021, the ERTC can be a significant source of financial relief for eligible employers.
Misconception 4: The ERTC is only for large businesses
Another common misconception is that the ERTC is only for large businesses. In reality, businesses of all sizes are eligible for the credit. Small and mid-sized businesses, in particular, may benefit from the credit, as they may have fewer resources to weather the financial impact of the pandemic.
Misconception 5: Employers can't claim the ERTC retroactively
Finally, some employers may believe that they cannot claim the ERTC retroactively. However, eligible employers can retroactively claim the credit for up to three years by amending their 2020 or 2021 tax returns.
Tips for Claiming the Employee Retention Tax Credit
Claiming the ERTC can be a complex process, but there are several tips that employers can follow to make the process easier and more successful.
Tip 1: Work with a tax professional
Claiming the ERTC can be a complex process, and it is important for employers to work with a tax professional to ensure that they are taking advantage of all eligible credits and deductions. A tax professional can also help employers determine their eligibility for the ERTC and calculate the amount of the credit.
Tip 2: Keep detailed records
To claim the ERTC, employers must be able to demonstrate that they meet the eligibility requirements and that they paid qualified wages. Employers should keep detailed records of payroll documentation, including employee names, wages, and hours worked. Employers should also keep records of their gross receipts and any government orders that affected their business operations.
Tip 3: Verify eligibility
Before claiming the ERTC, employers should verify that they meet the eligibility requirements. This includes confirming that they experienced a significant decline in gross receipts or a suspension of business operations due to COVID-19-related government orders. Employers should also confirm that they paid qualified wages during the eligible time period.
Tip 4: Claim the credit on a timely basis
The ERTC can be claimed on Form 941, the employers quarterly federal tax return. Employers should claim the credit on a timely basis to ensure that they receive the full amount of the credit.
Tip 5: Consider amending tax returns
Employers can retroactively claim the ERTC for up to three years by amending their 2020 or 2021 tax returns. Employers should consider amending their tax returns to claim the credit if they did not claim it on their quarterly tax returns.
Tip 6: Be cautious of third-party advice
Employers should be cautious of third-party advice when claiming the ERTC. The IRS has warned that some third-party advisers may be providing misleading information about the credit, and employers should verify any advice they receive with a tax professional or the IRS directly.
By following these tips, employers can increase their chances of successfully claiming the ERTC and maximizing their financial relief during the COVID-19 pandemic.
In Conclusion
The ERTC can be a valuable source of financial relief for eligible employers who have been impacted by the COVID-19 pandemic. The credit is designed to help businesses keep employees on payroll and recover from the financial impact of the pandemic.
Despite its benefits, many employers are still unaware of the ERTC or have misconceptions about the credit. By understanding the eligibility requirements, following best practices for claiming the credit, and working with a tax professional, employers can maximize their financial relief and take advantage of all eligible credits and deductions.
If you found this article helpful, be sure to check out our other great content on ertcguy.com for more tips and insights on HR, tax credits, and other important topics for employers.
Questions
Who is eligible for the employee retention tax credit?
Eligible employers include those who experienced a significant decline in gross receipts or a suspension of business operations due to COVID-19-related government orders.
What is the maximum amount of the employee retention tax credit?
The maximum amount of the credit is $28,000 per employee for 2021.
How can employers claim the employee retention tax credit?
Employers can claim the credit on Form 941, the employers quarterly federal tax return.
Who should employers work with to claim the employee retention tax credit?
Employers should work with a tax professional to ensure they are taking advantage of all eligible credits and deductions.
What is the deadline for claiming the employee retention tax credit?
Eligible employers can retroactively claim the credit for up to three years by amending their 2020 or 2021 tax returns.
How can employers ensure they are eligible for the employee retention tax credit?
Employers should verify their eligibility by confirming they paid qualified wages during the eligible time period and experienced a significant decline in gross receipts or a suspension of business operations due to COVID-19-related government orders.
