Employee Retention Tax Credit for Technology Companies
The COVID-19 pandemic has caused unprecedented financial stress for businesses across the globe. Technology companies have been no exception to this and have had to find ways to survive despite the economic downturn. One such way is through the Employee Retention Tax Credit (ERTC), which is a refundable tax credit available to eligible employers for wages paid to eligible employees from March 13, 2020, through September 30, 2021, including those who received PPP loans. The ERTC can be claimed on an employer's quarterly tax return and can provide significant relief to businesses during these challenging times.
In this article, we will discuss the eligibility criteria for ERTC, the calculation of the credit, and how to claim it. We will also provide examples of how technology companies can benefit from the ERTC.
Eligibility for ERC
To claim the ERTC, a business must meet certain eligibility criteria. The following are the two tests that a business must satisfy to be eligible for the ERTC.
Gross Receipts Test
The gross receipts test is one of the eligibility criteria for ERTC. A business must show that it has experienced a significant decline in gross receipts to be eligible for the credit. The test compares the gross receipts of a business in one quarter of 2021 with the same quarter of 2019. If there is a decline of more than 20% in gross receipts, then the business is eligible for the ERTC. Alternatively, it can compare the gross receipts in the immediately preceding quarter with the same quarter in 2019.
Partial Suspension Test
The partial suspension test is another criterion for ERTC eligibility. It applies to businesses that have been subject to a government order that has partially suspended their operations. The order must be related to COVID-19, and it must have affected the business's ability to continue its operations. If a business has been subject to a partial suspension order, it is eligible for the ERTC.
Safe Harbor Provision
The safe harbor provision provides employers with safe harbor if they are unsure of their eligibility for the ERTC. Employers can claim the credit if they have a good faith belief that they meet the eligibility criteria. If the IRS later determines that the employer was not eligible, the employer will not be penalized.
Calculation of ERC
The ERTC provides eligible employers with a refundable tax credit for wages paid to eligible employees from March 13, 2020, through September 30, 2021, including those who received PPP loans. The credit can be claimed on the employer's quarterly tax return and can provide substantial relief to businesses during the pandemic.
Eligible Wages
To calculate the ERTC, eligible employers must first determine the amount of eligible wages paid to eligible employees. Eligible wages include wages paid to an employee during a period in which the employer is eligible for the credit. The wages must be subject to Social Security tax and must not have been used to claim the paid sick and family leave tax credit under the Families First Coronavirus Response Act.
Maximum Credit Amount
The maximum credit amount for the ERTC is 70% of eligible wages paid by an eligible employer, up to $10,000 per employee, per quarter. Eligible employers can claim a maximum credit of $7,000 per employee, per quarter. The credit is calculated on a quarterly basis, and the maximum credit for each quarter is $7,000.
Interaction with Other COVID-19 Relief Programs
The ERTC can be used in conjunction with other COVID-19 relief programs, such as PPP loans and the R&D tax credit. However, wages used in calculating the ERTC must be excluded from the R&D credit claim. If a business has received a PPP loan, it may still be eligible for the ERTC, but the same wages cannot be used to claim both credits.
The ERTC is a valuable tool for eligible employers to offset payroll taxes and provide relief during the pandemic.
Claiming the ERTC
Claiming the ERTC can be a complex process, and it is important for eligible employers to understand the requirements and procedures for claiming the credit.
Claiming the Credit
The ERTC can be claimed on Form 941, Employer's Quarterly Federal Tax Return. Eligible employers can claim the credit for each quarter in which they are eligible. The credit can be used to offset the employer's share of Social Security tax liability and can be claimed even if the employer has no Social Security tax liability.
Retroactive Claims
Employers can retroactively claim the ERTC for 2020 by filing Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for each quarter in which they paid qualifying wages. The deadline for filing retroactive claims is three years from the date the original Form 941 was filed, or two years from the date the tax was paid, whichever is later.
Recovery Start-Up Businesses
Recovery start-up businesses that began operating after February 15, 2020, and that meet certain eligibility criteria can claim the ERTC on their fourth-quarter tax return for 2021. These businesses can claim up to $50,000 in credits for wages paid from October 1, 2021, through December 31, 2021.
Penalties
Employers should be cautious of third-party advice when claiming the ERTC, as penalties can be assessed for claims related to the credit. The IRS provides penalty relief for employers who have made good faith errors in claiming the credit.
Seeking Professional Assistance
Navigating the ERTC can be a complex process, and eligible employers may benefit from seeking professional assistance. Companies like TaxRxGroup and Krost CPAs can help tech business owners navigate government programs like the ERTC and secure federal and state tax credits to offset payroll taxes by thousands of dollars per year.
Conclusion
The ERTC is a valuable tool for eligible employers to offset payroll taxes and provide relief during the pandemic. The credit has been extended to January 1, 2022, and qualification is easier under the gross receipts test. Companies in the technology sector that experienced supply shortages or sharp declines in gross receipts should explore the ERTC to see if they are eligible for this refundable credit.
Navigating the ERTC can be a complex process, and eligible employers may benefit from seeking professional assistance. Companies like TaxRxGroup](https://www.taxrxgroup.com/erc-for-tech/) and [Krost CPAs can help tech business owners navigate government programs like the ERTC and secure federal and state tax credits to offset payroll taxes by thousands of dollars per year.
The ERTC can be used in conjunction with other COVID-19 relief programs, such as PPP loans and the R&D tax credit. However, wages used in calculating the ERTC must be excluded from the R&D credit claim. If a business has received a PPP loan, it may still be eligible for the ERTC, but the same wages cannot be used to claim both credits.
Employers should be cautious of third-party advice when claiming the ERTC, as penalties can be assessed for claims related to the credit. The IRS provides penalty relief for employers who have made good faith errors in claiming the credit.
In conclusion, the ERTC is a valuable resource for eligible employers to claim credits on wages paid to employees. By understanding the eligibility criteria, maximum credit amount, and claiming procedures, businesses can maximize their savings and receive the benefits of this refundable tax credit.
Additional Resources
Here are some additional resources for eligible employers to learn more about the ERTC:
IRS Website
The IRS website provides detailed information on the ERTC, including eligibility criteria, calculating and claiming the credit, and frequently asked questions. The website also includes updates on changes and extensions to the credit.
https://www.irs.gov/coronavirus/employee-retention-credit
TaxRxGroup
TaxRxGroup helps tech business owners navigate government programs like the ERTC and secure federal and state tax credits to offset payroll taxes by thousands of dollars per year. Their website provides information on the ERTC, eligibility criteria, and claiming procedures.
https://www.taxrxgroup.com/erc-for-tech/
Krost CPAs
Krost CPAs provides comprehensive tax planning and compliance services to technology companies. Their website provides information on the ERTC, including eligibility criteria, calculating and claiming the credit, and retroactive claims.
2021 Tax Planning for Tech Companies: Employee Retention and R&D Credits
US Chamber of Commerce
The US Chamber of Commerce provides information on the ERTC, including eligibility criteria, calculation and claiming procedures, and changes and extensions to the credit. Their website also includes resources and tools for businesses affected by the pandemic.
https://www.uschamber.com/co/run/finance/how-to-get-employee-retention-tax-credit
KBKG
KBKG is a tax consulting firm that provides comprehensive services to businesses in various industries. Their website provides information on the ERTC, including eligibility criteria, claiming procedures, and retroactive claims. They also offer a free ERTC calculator to help businesses determine their potential credit amount.
By utilizing these additional resources, eligible employers can gain a deeper understanding of the ERTC and receive the benefits of this valuable tax credit.
That's a Wrap
The ERTC is a valuable resource for eligible employers to claim credits on wages paid to employees. By understanding the eligibility criteria, maximum credit amount, and claiming procedures, businesses can maximize their savings and receive the benefits of this refundable tax credit.
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Thank you for reading, and we hope this article has been informative and helpful in navigating the ERTC.
Answers To Common Questions
Question: Who is eligible for the employee retention tax credit for technology companies?
Answer: Eligible employers are those who paid wages to employees during the pandemic or had significant declines in gross receipts.
Question: What is the maximum credit amount for the employee retention tax credit?
Answer: The maximum credit amount is $5,000 per eligible employee for wages paid between March 13, 2020 and December 31, 2021.
Question: How can eligible employers claim the employee retention tax credit?
Answer: Eligible employers can claim the credit on their employment tax returns, Form 941, or file a Form 7200 for an advance payment.
Question: What is the gross receipts test for the employee retention tax credit?
Answer: The gross receipts test determines eligibility based on a significant decline in gross receipts compared to the same period in 2019.
Question: How does claiming the employee retention tax credit affect other COVID-19 relief programs?
Answer: If a business has received a PPP loan, it may still be eligible for the ERTC, but the same wages cannot be used to claim both credits.
Question: What penalties can be assessed for claims related to the employee retention tax credit?
Answer: Employers should be cautious of third-party advice when claiming the ERTC, as penalties can be assessed for claims related to the credit. The IRS provides penalty relief for employers who have made good faith errors in claiming the credit.
