The Employee Retention Tax Credit can be a huge benefit for businesses. But how does it work? And who is eligible to claim it? This article will walk you through the process.
If you’re a business owner, then you know that it can be tough to keep your employees around. It seems like they’re constantly jumping ship for better opportunities. But did you know that there’s a tax credit available to help incentivize retention? Whether you are a small business owner or a large corporation, you can claim the credit.
Here are some tips to get you started. Hopefully, these tips will help you maximize the benefits of the credit. The first step is to find out what the tax credit is and how to take full advantage. The next three steps will show you exactly what you need to do to claim the credit.
What is The Employee Retention Tax Credit?
The Employee Retention Credit allows employers to retain a certain amount of payroll as a result of the Consolidated Appropriations Act. This amount can be up to $25,000 per employee. The qualification criteria have been amended several times through the CARES Act, Consolidated Approprations Act, Infrastructure Investment and Jobs Bill, and the American Rescue Plan Act.
Qualified wages are wages paid, including health care costs, to the employee whether or not the employee is performing services. The credit can be claimed for small businesses that pay qualified wages. Companies looking to claim the ERTC must report their total qualified wages, as well as the related health insurance costs, on their quarterly tax returns (Form 941 for most employers).
However, the IRS has guardrails to ensure that wage increases do not count as credits. Small businesses can only use the credit if they have 100 or fewer full-time employees. For 2021, the limit was increased to 500 or fewer full-time employees.
All Wages Paid Are Qualified Wages Paid!
If the number of employees is below a certain threshold, the employee may be eligible for this credit. Companies looking to claim the ERTC must report their total qualified wages paid, as well as the related health insurance costs, on their quarterly tax returns (Form 941 for most employers).
However, if the eligible employer has a lot of turnover in its workforce, the credit may not be available for that quarter. In such cases, the employer must file an amended Form 941 to claim the credit. The credit is equal to 70% of the qualified wages, up to a maximum of $10,000 or $7,000 per employee, depending on the number of full-time employees. If you have questions about whether your wages qualify then please reach out to a qualified tax professional.
Read more about the importance of tax planning for a small business.
The Employee Retention Tax Credit (ERTC) was created by Congress in March 2020. It has been extended and expanded twice since then due to the Disaster Tax Relief Act and Taxpayer Certainty Act. Although the Infrastructure Investment and Jobs Act retroactively ended the Employee Retention Credit (ERC) in November 2021, businesses still have time to claim the credit on their 2021 tax returns. The credit was originally scheduled to expire on January 1, 2022, but the Consolidated Appropriations Act, 2021, has retroactively extended the deadline.
This means that eligible employers can still claim the credit for the 2020 and 2021 taxes. For more information, visit the IRS website.
How Does the Employee Retention Credit Work?
The ERC can be used to help companies retain workers. The credit is based on the qualified wages paid that an employee earns from the employer that is subject to FICA taxes. It is available on wages paid between March 12, 2020, and Sept. 30, 2021, except for Recovery Startup Businesses that have until Dec. 31, 2021. The credit is also applicable to qualified wages paid that are not forgiven under the Paycheck Protection Program.
Eligible employers can get access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not enough to cover the credit, the employer may get an advance payment from the IRS.
Who Was This Credit Intended For?
The program is aimed at small businesses that are facing economic hardship and have made significant reductions in their workforce. The credit can be valuable to employers who are struggling to maintain a workforce, but there are a few prerequisites.
In order to receive the full benefit, a company must reduce costs by at least 25%. In 2020, a business could receive up to $5,000 per employee. By 2021, employers will receive 70 percent of qualified wages paid to employees. There are special rules for recovery startup businesses, so please speak to a tax professional for advice regarding a startup business.
- A decline in gross receipts, calculated on a quarterly basis – a 50% reduction in 2020 and/or a 20% decrease in 2021, compared to 2019
- A shutdown due to a government order, which can be a full or partial shutdown – think physical space.
- A Government order caused more than a nominal effect – consider a modification of your business operations.
Has Your Business Experienced a Decline In Gross Receipts?
Additionally, the business must’ve had a decline in gross receipts. Gross receipts include the total amount of all payments received by a business. This number is calculated before subtracting any costs or expenses.
When the IRS states that gross receipts must have a significant decline, they are referring to a number that is 50-80% depending on the years you are contrasting. If you are one of the recovery startup businesses that started after February 2020, and you don’t have gross receipts from 2019 to compare to then you can use your gross receipts from 2020.
Unsure If Your Business Qualifies?
The Internal Revenue Service is issuing guidance for employers on the Employee Retention Credit. This refundable credit allows employers to deduct up to $7,000 per employee per quarter, if their qualified wages were paid before October 1, 2021.
In addition, some employers may be eligible for an advance from the IRS if they have incurred substantial expenses, including payroll costs, during the recovery of their business in the same calendar quarter.
The ERC is available only for the periods during which your business was affected by the government order. This means that if you were shut down or had to modify your business because of the order, you can qualify for the credit only for the days on which you were actually impacted. For example, if your business was closed for 90 days, you can claim the credit for those days. It can also be used as an incentive to keep existing employees and reduce overall payroll costs.
If your business didn’t meet the 50 percent or 20 percent decline in gross receipts tests, the only way to qualify for the ERC is if it was due to a government order.
Did Your Business Experienced Changes Due to a Government Order?
Another way your business can qualify for the ERTC is if a government order caused effects. One of the requirements is that these need to be more than nominal effects. Additionally, you can qualify if a government order caused a full or partial suspension of your business.
- Reduced hours of operations
- A temporary shutdown due to state or local orders
- You had to limit the office to a select amount of workers
- A government-enforced curfew and your staff could not work
- Shutdowns for periodic cleaning and disinfection
- The government caused a supply chain description, and this resulted in reduced operations
- Limitations on access to your physical space
- Limitations on size of gatherings, which affected your business.
- This is not an exhaustive list, so if you think you may qualify, feel free to reach out to us to inquire
Full vs. partial shutdown
You likely have no trouble identifying the full shutdown caused by a federal, state, or local government order. One thing to remember, as we mentioned before: when you qualify for the ERC under the full or partial shutdown, you earn the ERC only for the shutdown period.
A full or partial shutdown due to a government order must demonstrate a nominal effect on your business. The IRS has stated the safe harbor amount is 10%. Meaning did the shutdown have a more than 10% effect on gross receipts due to the limitations imposed by the government on the business or a portion of the business? Or did the hours of service performed by employees for that portion of the business have a more than 10% effect? Therefore, we generally perform gross receipts and worker hours tests when reviewing for qualification.
Additionally, you can qualify if a government order caused a full or partial suspension of your business, please user the pre-qualifier quiz above to see if you can qualify.
Who is Eligible for the Employee Retention Credit?
The Employee Retention Credit is an incentive for eligible employers to retain employees. The IRS established this tax credit to encourage employers to retain their existing employees and pay them a higher wage.
Employers that hire at least one new employee during a qualifying year can receive a credit equal to 50% of their qualified wages up to a maximum of $10,000. There is no maximum limit on the amount of credit that can be claimed per employee.
Does The Size of My Business Matter?
This credit is available to most small businesses subject to employee count as discussed below. The rules for smaller employers vary slightly. Those with under a hundred employees must follow different rules than those with more than five hundred employees. There are also new rules for determining eligibility in certain parts of 2020 and 2021, that extends beyond the gross receipts test.
If your business is eligible, you must have had a significant decline in gross receipts during a calendar quarter. Additionally, your business can qualify if you had a full or partial shutdown caused by a government order. Further, if a government order caused your business to have more than a nominal effect.
While the rules for larger employers are similar to those for smaller employers, they do have a few exceptions.
How to Claim The Credit
As a business owner, you’re always looking for ways to save money and improve your bottom line. One way to do this is to take advantage of the employee retention credit. This credit is available to businesses that keep their employees on the payroll during tough economic times. To claim the employee retention tax credit, you’ll need to follow these steps:
First, you’ll need to verify that your business is eligible. The employee retention tax credit is available to businesses of all sizes, but there are some restrictions. For example, businesses that have received financial assistance through the Payroll Protection Program are not eligible.
Once you’ve verified that your business is eligible, you’ll need to calculate the amount of the credit. The employee retention tax credit is worth up to $5,000 per employee, so it can add up quickly.
Finally, you’ll need to file certain amended tax forms; you should speak to a professional for this step. There are very complex calculations required to apply, so be sure to fill it out completely and accurately.
Talk to a tax professional about claiming the ERTC, and they should be able to answer any questions you have regarding the necessary steps and documents to take.
Self-Employed Individuals and Government Employers Do Not Qualify
The ERC can provide immediate cash relief and a large amount of credit to employers. The credit is a fully refundable credit applied to a company’s federal payroll tax liability. It is not available to self-employed individuals or government employers.
However, if you think that your company is eligible for the credit, you should talk to a tax professional to help you fill out the correct Form 941-X.
Note that as of September 2023, the IRS has paused processing ERC claims due to scams until the end of 2023. That means you can still apply (as long as it’s prior to the deadline to amend for a refund), but the IRS won’t process your claim until it lifts the processing moratorium.
Use This Credit to Retain Your Employees!
The ERC is a great way to retain employees. This government credit is meant to support companies in the process of keeping employees. While some people may not be aware of this credit, it serves as a lifeline to many businesses.
Whether you’re a small business or a large employer, you can claim the ERTC to reduce the cost of employing new employees. But before claiming the credit, check the qualifications and take the quiz to find out if you qualify.
How To Use the Credit
There are many different benefits to retaining employees in your small business. Many organizations are hesitant to reduce their staff because of government policies, but the Employee Retention Credit is an excellent way to reward these efforts.
For example, nonprofits can receive credit for keeping employees on staff. However, some businesses may not be eligible for the credit. This credit is available to most employers, so long as they’ve made reasonable efforts to keep employees.
The IRS offers some guidance and examples for employers to maximize their benefits. It’s not mandatory to use the Employee Retention Credit, so if you’re not eligible, you can always opt not to take advantage of the credit. The credit is worth 70 percent of the qualified wages and associated health plan expenses that you pay to employees.
What Benefits Are Associated With the ERTC?
There are several benefits associated with claiming the employee retention tax credit. First, it provides businesses with much-needed financial assistance during challenging times. Second, it helps businesses retain valued employees who might otherwise be laid off or furloughed.
Finally, it helps businesses keep their doors open and their employees employed, which is good for the economy as a whole.
If your business has been impacted by the COVID-19 pandemic, be sure to take advantage of the employee retention tax credit.
More Questions? Talk To an Experienced Tax Attorney Today
If you’re an employer, the employee retention tax credit may be a valuable incentive to keep your employees on staff. The requirements and benefits of the ERTC can change depending on the size of your business and gross receipts, so it’s important to stay up-to-date on the latest information. It’s also important to understand ERC audit red flags so that you don’t make mistakes on your return that increase your risk of being audited and incurring penalties.
Luckily, our team is here to help. At Damiens Law, we provide our clients with all the information they need to make the best decisions for their business. Call us today for more information about how you could qualify for this credit and retain your valuable employees.