In today’s competitive job market, employee retention can be a challenge. Fortunately, businesses may be eligible for the Employee Retention Tax Credit (ERTC), which gives employers tax credits for wages paid to employees in certain circumstances. This article will explain how you can claim this credit and maximize its benefits.
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The first step is understanding the eligibility requirements of ERTC. To qualify, your business must have experienced an economic hardship due to the ongoing coronavirus pandemic. You must also retain or rehire workers whose employment was impacted by the pandemic and pay them at least $10,000 between March 13th and December 31st of 2020. If you meet these criteria, then you are likely eligible for ERTC.
Once you’ve determined that your business qualifies for ERTC, it’s time to begin claiming it! The process begins with figuring out exactly how much credit you’re entitled to receive based on your specific situation. Then you’ll need to fill out IRS Form 941-X and submit it along with any required supporting documents in order to take advantage of the credit. We’ll go over each step involved in more detail below so that you can start taking full advantage of ERTC as soon as possible!
Overview Of ERTC
The Employee Retention Tax Credit (ERTC) is a tax incentive for businesses to keep their employees on payroll during the COVID-19 pandemic. The credit, which was enacted as part of the CARES Act in 2020, provides employers with up to $5,000 per employee in federal tax credits. This helps businesses offset some of their costs associated with maintaining employees on payroll and allows them to continue operating while facing difficult economic times.
To qualify for the ERTC, an employer must meet certain criteria including having experienced a full or partial closure due to governmental orders related to COVID-19, or have seen revenue decline by more than 20% compared to 2019 levels. Employers who are eligible can receive a refundable credit equal to 50% of qualified wages paid between March 13, 2020 and December 31, 2021; each employee’s wages are limited to $10,000 per year. Additionally, self-employed individuals may also be able to claim this credit if they experience similar circumstances.
The filing process for claiming the ERTC depends upon whether an employer has already claimed other relief under the CARES Act such as the Paycheck Protection Program (PPP). If an employer has not previously applied for PPP funds or any other relief from the CARES Act, then they will need to file Form 7200 with their quarterly 941 payroll return. For those that have received PPP loans but haven’t yet filed for forgiveness of those loans should still file Forms 7200 and 941 simultaneously when claiming ERTC benefits.
Eligibility Requirements
To be eligible for the employee retention tax credit, an employer must qualify in three ways. First, it must have been forced to suspend operations due to a government order related to COVID-19, or its gross receipts declined by more than 50% when compared with the same quarter of 2019. Second, it must maintain its workforce either at full capacity or at least 90%. Third, wages paid during the period between March 12th and December 31st in 2020 are taken into account while calculating this credit.
The employee retention tax credit is calculated based on certain criteria such as number of employees employed before February 15th, 2020; qualified wages paid per employee; and amount of credits available. Employers may claim up to $5,000 in refundable payroll taxes (or cash payments) per each eligible employee who was part of the organization’s staff prior to February 15th and received qualified wages for that particular time period. Qualified wages include salary plus any other form of remuneration including bonuses or overtime pay. However, employers cannot double dip from both the Employee Retention Credit and Payroll Tax Credits programs simultaneously – they need to choose one program over another depending upon their current financial situation.
When filing for this credit, employers should keep records regarding the number of employees employed prior to February 15th as well as all wage information from them from March 12 through December 31st so that calculation can be done accurately and efficiently. Additionally, employers should review federal guidelines carefully since there could be situations where these rules don’t apply (such as if governmental orders only partially suspended business activities). By taking all proper steps needed beforehand, employers can make sure they get maximum benefit out of this program without having any issues down the road.
Calculating The Credit Amount
Calculating the amount of employee retention tax credit you are eligible for is a straightforward process. First, you’ll need to calculate your Qualified Wages and Eligible Retention Period (QWERP). To do this, take the total wages paid during the calendar quarter that have been subject to employer social security or Medicare taxes and divide it by two. This will give you your QWERP amount.
Next, apply any credits from the prior year’s payrolls against your current year’s qualified wage expenses. If there were no such credits in either period, then proceed to step three. You can also elect to not use all of the credits available for a particular pay period; however, if this method is used, make sure that you keep track of unused credits so they may be applied in future years’ returns.
For each qualifying employee on an active roster at the end of each applicable pay period during an eligible quarter, multiply their respective gross wages times 50%. This figure represents that individual employee’s maximum potential credit allowance. Be aware though: if an employee has already received benefits under another COVID-19 relief program like Paid Leave Credits or Employee Retention Assistance Grants, those payments must be deducted from their allowable ERTC limit before calculating what portion of the overall credit should be allocated towards them.
Claiming The Credit On Tax Returns
Now that you know the credit amount, it’s time to claim it on your tax returns. This can be done in two ways: through a reduction of taxes owed or as a refundable tax credit. To reduce your taxes owed, simply subtract the eligible portion of the employee retention credit from any other credits you are claiming and add the difference to the total amount of taxes due when filing your return. If claiming the full employee retention credit would result in no taxes being owed, then you may instead opt to receive the entire credit as a refundable tax credit.
When requesting a refundable tax credit, complete Form 941-X by providing information regarding wages paid and qualified health plan expenses incurred during 2020 for which employees received a credit under Section 45S of the Internal Revenue Code. Attach this form along with Schedule A (Form 941) or Form 944 when submitting your return. You will also need to provide documentation such as payroll records showing evidence of wages paid and proof of expenditure related to health care costs during this period if requested by IRS authorities during an audit.
It is important to remember that employers cannot take advantage of both Paycheck Protection Program loans and Employee Retention Credits at once; they must choose one or the other depending on their situation since receiving funds from both may lead to penalties imposed by federal agencies like Small Business Administration or Treasury Department. However, employers who have already taken out PPP loans but don’t qualify for loan forgiveness can still claim employee retention credits after returning all PPP funds before December 31st 2021.
Record Keeping Requirements
When claiming the employee retention tax credit, it is important to keep records of all expenses for which you are claiming a credit. The IRS requires that employers maintain accurate and complete payroll information, including pay dates and amounts paid to employees. Keeping detailed records of your wages and other costs associated with maintaining employment will help ensure you receive the full benefit of the employee retention tax credits available.
You must also document any changes in hours worked or salary reductions during this period. This documentation should include details on when such changes were made and their impact on total wages earned by each employee over the course of the year. Additionally, if certain employees have been furloughed due to lack of work or business closure, employers need to provide evidence of those instances as well.
Finally, make sure to retain copies of federal income tax returns filed during the applicable periods covered by the Employee Retention Tax Credit program. These documents may be used later to verify that you qualify for the maximum allowable amount under the program. It’s recommended that these documents be kept for at least six years from now so that they can be provided upon request from an authorized government agency or auditor, if needed.
Potential Pitfalls To Avoid
When claiming the employee retention tax credit, it’s important to ensure that you understand all of its nuances in order to avoid any potential pitfalls. First and foremost, employers must meet certain criteria laid out by the IRS in order to be eligible for the credit. For example, businesses may only qualify if they have seen a significant decline in gross receipts compared to the same quarter in 2019 or experienced an economic shutdown due to COVID-19 related orders from a governmental authority. Additionally, those who are able to access Paycheck Protection Program (PPP) loans do not qualify for this credit unless they have fully exhausted their PPP loan funds first.
Another consideration is that while some employers may already receive other government funding such as FFCRA sick leave credits, these amounts are considered taxable income and therefore cannot be included when calculating wages eligible for ERTC reimbursement. Furthermore, there are limits on how much can be claimed each quarter and also on how many employees qualify; generally speaking no more than 500 full-time equivalents per employer can take advantage of ERTC benefits at any given time. Lastly, timing also plays an important role; claims need to be made within specific deadlines set forth by the IRS which vary depending upon where in the calendar year your business falls.
With so many details involved it’s easy for mistakes to happen when attempting to claim the employee retention tax credit – but with proper planning and attention paid to detail there’s no reason why your business shouldn’t benefit from this valuable incentive program. Doing your research ahead of time will help you make sure that you maximize your available options and don’t miss out on something you’re entitled too!
Conclusion
In conclusion, claiming the employee retention tax credit can be a great way to get some extra help during difficult times. It is important to make sure that you are eligible for this credit and understand how it works before attempting to claim it on your taxes. Calculating the amount of the credit can be tricky, so having good records will help ensure you get the most out of this potential benefit. Additionally, being aware of potential pitfalls like not filing in time or failing to meet other requirements could save you from costly mistakes down the road. All in all, if you do your research and pay close attention when preparing your taxes, taking advantage of an employee retention tax credit could provide much-needed financial relief during these trying times.