The Employee Retention Tax Credit (ERTC) is one of the most significant tax incentives for employers to maintain their workforce during uncertain economic times. With a deeper understanding of this credit and how it functions, employers can leverage the benefits and support employee retention. In this article, we will delve into the crucial aspects of ERTC that every employer should be aware of.
An Overview of the Employee Retention Tax Credit
The ERTC is a refundable tax credit designed to encourage employers to retain their employees despite facing hardships arising from unforeseen circumstances like the COVID-19 pandemic. The credit applies to employment taxes, allowing employers to offset a portion of their tax liability by claiming credits against qualified wages paid to eligible employees.
Eligibility Requirements for Employers
To qualify for the ERTC, an employer must meet certain criteria:
- Experience full or partial suspension of operations due to government orders limiting commerce, travel, or group meetings as a result of a crisis such as the COVID-19 pandemic.
- Witness a significant decline in gross receipts compared to the same quarter in the previous year.
Note that certain organizations, such as tax-exempt entities and small businesses, may have different eligibility requirements.
Qualified Wages for ERTC
Once an employer determines their eligibility, they must identify the qualified wages applicable for the ERTC. Qualified wages are those paid to employees during periods when the business meets the eligibility requirements listed above. It is essential to note that wages used to claim other tax credits, like the Work Opportunity Tax Credit (WOTC), cannot be double-counted for the ERTC.
Calculating Employee Retention Tax Credit
The amount of ERTC available to employers depends on several factors, such as the size of their workforce and the wages paid during the qualifying period. The calculation of this credit has evolved since its inception in 2020 to accommodate changes brought about by subsequent legislations.
ERTC Calculation for 2020
In 2020, eligible employers could claim a refundable tax credit equal to 50% of qualified wages paid between March 13, 2020, and December 31, 2020. The maximum amount of qualified wages per employee was set at $10,000, which resulted in an ERTC cap of $5,000 per employee for the year.
ERTC Calculation for 2021
As part of ongoing relief efforts, the ERTC was extended and modified for 2021. Employers can now claim a refundable tax credit equal to 70% of qualified wages paid between January 1, 2021, and December 31, 2021. Moreover, the maximum amount of qualified wages per employee increased to $10,000 per quarter, resulting in a potential ERTC cap of $28,000 per employee for the year.
Claiming the Employee Retention Tax Credit
To claim the ERTC, employers must report their total qualified wages and related health insurance costs for each calendar quarter on their employment tax return, typically filed using Form 941. If the employer's tax liability is less than the computed ERTC, they may receive a refund in the form of a refundable tax credit.
Advance Payments of ERTC
Employers facing immediate cash flow constraints can access the ERTC in advance by submitting Form 7200 to the Internal Revenue Service (IRS). This form allows them to request an advance payment of the credit, which is then reduced from their employment tax deposits.
ERTC Interaction with Paycheck Protection Program
Initially, businesses receiving a loan under the Paycheck Protection Program (PPP) were ineligible for the ERTC. However, subsequent legislation allowed PPP recipients to claim the ERTC, provided they do not use the same wages to seek forgiveness for their PPP loan and claim the ERTC simultaneously.
Navigating Employee Retention Tax Credit Challenges
While the ERTC offers substantial financial relief to employers, several challenges may arise in determining eligibility, calculating the credit, and interacting with other tax incentives. Employers should consider seeking guidance from tax professionals or consulting IRS resources to ensure accurate and timely filing, maximizing the benefits of this valuable tax credit.