What is Employee Retention Credit and How Do You Claim It?
May 23, 2023
The COVID-19 pandemic was a massive turning point for several businesses across the US, particularly in maintaining their workforce. It led to the creation of the Employee Retention Credit (ERC) by Congress in an effort to help curb the global health crisis’ impact on employment and business operations.
The ERC has helped businesses recover lost revenue and reduce employee turnover and unemployment rates.
If you are in the process of claiming your employee retention credit but don’t know where to start, don’t worry. This article provides all the necessary information to learn about Employee Retention Credit, so read on!
- Employee Retention Credit is a type of payroll tax credit established by the federal government in response to the small businesses affected by the COVID-19 pandemic.
- Recovery startup businesses, small businesses whose operations were suspended either partially or fully, and businesses in aggregated groups qualify for ERC.
- The IRS has an amended comparison chart for the tax year 2020 and 2021 to help business owners verify their eligibility for ERTC.
- Under the adjusted employer’s federal tax return, employers can claim their Employee Retention Tax Credit for Q2, Q3, and Q4 of 2020 until April 24, 2024. ERTCs for all quarters of 2021 may be claimed until April 25, 2025.
What is Employee Retention Credit?
The Employee Retention Credit (ERC) is among the different payroll tax credits created by the federal government as a relief measure for small businesses following the onset of COVID-19.
Specifically, the ERC supported employers who continued to compensate their employees while their business operations were affected by the pandemic. It was first included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, before it was expanded after the Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020
As a refundable tax credit, the Employee Retention Credit covers up to 70% of qualified wages that employers have paid to their workers after December 31, 2020, up to June 30, 2021. The said payroll credit is also applicable to specific health insurance costs.
Employee Retention Credits are claimed from the employer’s share of Social Security taxes.
What Businesses Qualify for the Employee Retention Program?
The IRS has specified that businesses and employers that are part of an aggregated group that is supervised under shared ownership qualify for the employee retention program. Examples of aggregated groups include a single-parent company owning 50% of the groups and combined corporations and entities.
At the same time, small businesses that had to postpone their operations either partially or fully are also qualified, along with those that experienced a significant decrease in sales due to the pandemic.
Recovery startup businesses or establishments that remained open and continued operations amid the COVID-19 onslaught are eligible to claim credit under the employee retention program.
Which Employees are Eligible for the ERTC?
All full-time employees working in a company of 100 employees or less are eligible for the Employee Retention Tax Credit (ERTC). The ERTC is a type of tax deduction for reimbursed expenses.
Workers employed by companies with over 100 employees are eligible as well. However, their qualified wages are limited to those paid to them by their employers from March 13, 2020, to December 31, 2020.
How to Calculate Your Employee Retention Credit
Before calculating your employee retention credit, it is best to check the following documents and provisions to verify that your business qualifies for ERC:
- Form 941. Determine the total refundable credit amount for your business based on your qualified expenses for health plans and qualified quarterly employee wages.
- 2019 tax returns. Compare wages paid to employees in the succeeding years 2020 and 2021.
- 2020 tax returns. This is specifically if you have dutifully fulfilled repayment for your loans on or before the deadline and did not receive any funds from PPP loans.
- 2021 tax returns. Regardless of whether you received PPP loans or not, you should check these returns.
You should also check the number of employees you had in 2020 and 2021. Remember, if you did not employ any workers or staff, you are automatically disqualified from receiving ERC.
If you want a more in-depth reference, visit the IRS’s 2020 vs. 2021 comparison chart.
How to Calculate the Employee Retention Credit
Once you have fully verified that your business qualifies for ERC, follow these instructions for Employee Retention Credit calculation:
- Assess the condition of your business within the quarters in 2020 and 2021 that are covered by the ERC. If your business had undergone a partial or full suspension of operations, it must be due to a directive from government authorities or based on implemented criteria in preventing the spread of COVID-19.
- Compare your business’s revenue per quarter from 2019 to 2020, and then from 2020 to 2021. It is essential that you have gross receipts providing evidence of a significant loss in revenue of at least 50% in 2020. For 2021, the losses in your revenue should be no less than 20%.
- Add all employee wages paid by your business during the qualifying quarters of 2020 and 2021. Employee wages must also include hourly pay, part-time and full-time salaries, and health insurance expenses.
- Consult with your accountant or a financial expert for a more accurate calculation or estimation of your ERTC.
How to Claim the Employee Retention Credit
Use IRS Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Tax Refund) for each qualifying quarter where your business paid eligible wages if you want to claim your employee retention credit.
Form 941-X allows you to correct all errors and apply the needed adjustments
to a previously filed Form 941.
You can file your Claim for Tax Return form for up to three years following the year or deadline set for the original payroll taxes. For example, if you want to claim your ERTC for the tax year 2020 (Q2 to Q4), you have until April 15, 2024, to do so. For 2021 ERTCs (all quarters), you can file your Form 941-X on or before April 15, 2025.
Benefits of the Employee Retention Credit
Claiming your ERC provides the following advantages for your business:
- Reduced payroll taxes. With a diminished amount of taxes to pay to the IRS, your business is left with more funds to cover its existing operational expenses. More importantly, you get to save more money to prepare your staff and your company for any unforeseen emergency or crisis in the future.
- Reduced Social Security tax liability. The rule is if your ERTC exceeds your tax liability for Social Security, then you are entitled to receive a refund from the IRS.
- Zero repayment. The Employee Retention Credit should not be mistaken as any form of loan. Hence, you do not have to worry about repaying the refunded amount that you will claim for your ERC.
- Fast processing for early tax returns. Processing and disbursing ERC claims are said to take a shorter time, given the urgency and circumstances for which the payroll tax credit was established. Just make sure to file your tax returns as early as possible to receive your refund faster.
- Multiple industries as qualifying businesses. The ERC is not limited to a few industries. In fact, it encompasses a long list of businesses, including but not limited to commercial buildings, private schools, auto repair shops, franchises, hotels, etc.
Is There a Deadline for Claiming the Employee Retention Credit?
Prior to the issuance of the adjusted employer’s federal tax return or claim for refund, most qualifying businesses were allowed to claim their ERTC until September 30, 2021. Some businesses were allowed a filing extension until December 31, 2021.
Presently, the deadlines for retroactive Employee Retention Credit or amended returns were recently extended until 2024 and 2025. It depends on whether you are claiming returns for the 2020 or 2021 tax years.
Nothing is more crippling than losing a stable source of income amid a global health crisis. Business owners and employers are both in a stalemate, and a lucrative alternative to regain significant monetary losses was among the best ways to recover.
The Employee Retention Credit paved the way for the creation of several laws meant to support businesses that have been badly hit by the recent pandemic. It also gave rise to more provisions that encouraged employers to exert all efforts and resources needed to keep existing employees on their payroll.
Use this article as a helpful guide in assessing your qualifications for ERTC and checking whether you can still claim your refund in 2024 or 2025.
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