Employee Retention Tax Credit Evaluation Criteria
The Employee Retention Tax Credit (ERTC) is a valuable tax incentive program that aims to support businesses in retaining their employees during challenging economic times. It provides eligible employers with a refundable tax credit for a percentage of qualified wages paid to employees. However, to benefit from this program, employers must meet certain evaluation criteria outlined below.
Eligibility Requirements
To determine if your business qualifies for the Employee Retention Tax Credit, you need to meet the following eligibility criteria:
Business Operations: Your business must have been in operation during the calendar year for which you are claiming the credit or had a partial suspension of operations due to government orders related to COVID-19.
Reduction in Gross Receipts: You must demonstrate a significant decline in gross receipts compared to a prior qualifying period. For the ERTC, a significant decline means a decrease of at least 50% in gross receipts when comparing the same calendar quarter of 2020 with the corresponding quarter in 2019. Alternatively, you may qualify if your gross receipts in a quarter are less than 80% of the gross receipts from the same quarter in 2019.
Government Mandate: If your business experienced a full or partial suspension of operations due to a government order related to COVID-19, you automatically meet the eligibility requirements for the ERTC during the period of suspension.
Employee Count: The maximum number of employees allowed differs depending on the year. For 2020, businesses with an average of 100 or fewer full-time employees during 2019 can claim the credit for wages paid to all employees. However, for 2021, this threshold is reduced to businesses with an average of 500 or fewer full-time employees during 2019.
Qualified Wages and Healthcare Costs
Once you determine that your business meets the eligibility requirements, you need to understand which wages and healthcare costs qualify for the Employee Retention Tax Credit. Here’s a breakdown:
Qualified Wages: Eligible wages include compensation paid to employees, including salary, wages, and tips. However, the amount of qualified wages may vary depending on the average number of full-time employees the business had in 2019. For businesses with an average of over 100 full-time employees, qualified wages only include wages paid to employees who are not providing services due to the COVID-19-related circumstances described in the eligibility requirements.
Healthcare Costs: Qualified healthcare costs paid or incurred by the employer may also be considered in the calculation of the tax credit. These costs can include both the employer’s share of health plan premiums and the cost of providing healthcare benefits to employees.
It’s important to note that the ERTC cannot be claimed on the same wages used to apply for other tax credits, such as the Paid Sick and Family Leave Credits or the Work Opportunity Tax Credit.
Calculating the Employee Retention Tax Credit
To calculate the Employee Retention Tax Credit, you need to determine the qualified wages and healthcare costs during the eligible period. The credit is equal to a percentage of those qualified wages and healthcare costs, which can be up to 70% of eligible wages paid between March 13, 2020, and December 31, 2021.
The eligible wages are subject to a maximum limit per employee. For 2020, the limit is $10,000 per employee for the entire year, while for 2021, the limit is increased to $10,000 per employee per quarter. This means that the maximum credit amount per employee for 2020 is $5,000, and for 2021, it is $7,000 per quarter.
Employers can claim the credit by either reducing their federal employment tax deposits or requesting an advance payment from the IRS using Form 7200.
Documentation and Recordkeeping
To support your claim for the Employee Retention Tax Credit, it is crucial to maintain proper documentation and records. This includes:
Gross Receipts Documentation: Retain records that demonstrate the decline in gross receipts, such as financial statements, sales records, or relevant accounting documents.
Government Orders: Keep copies of any government orders or official guidance that caused the full or partial suspension of your business operations.
Employee Count Records: Maintain records of the average number of full-time employees for 2019 to determine if your business meets the employee count requirements.
Wage and Healthcare Cost Records: Document the qualified wages and healthcare costs paid during the eligible period, including payroll records, employee time sheets, and healthcare benefit invoices.
Tax Returns and Forms: Ensure you have filed all required tax returns, including Form 941, to report employment taxes accurately.
By maintaining comprehensive documentation, you can substantiate your claim and provide evidence of compliance with the Employee Retention Tax Credit evaluation criteria.
Conclusion
The Employee Retention Tax Credit is a valuable program that can provide financial assistance to businesses striving to retain employees during challenging economic conditions. By understanding and meeting the evaluation criteria, businesses can navigate the complexities of the program and benefit from the tax credit. Ensure you consult with a qualified tax professional to address any specific questions or concerns related to your eligibility and application process for the ERTC.
FAQ
The Employee Retention Tax Credit is a tax incentive program that provides eligible employers with a refundable tax credit for a percentage of qualified wages paid to employees in order to support businesses in retaining their employees during challenging economic times.
- What are the eligibility requirements for the ERTC?
To qualify for the Employee Retention Tax Credit, your business must meet the following criteria:
– Your business must have been in operation during the calendar year for which you are claiming the credit or had a partial suspension of operations due to government orders related to COVID-19.
– You must demonstrate a significant decline in gross receipts compared to a prior qualifying period.
– If your business experienced a full or partial suspension of operations due to a government order related to COVID-19, you automatically meet the eligibility requirements.
– The maximum number of employees allowed differs depending on the year.
- How do I determine if my business meets the reduction in gross receipts requirement for the ERTC?
To meet the reduction in gross receipts requirement for the Employee Retention Tax Credit, you need to show a significant decline in gross receipts. This can be done by comparing the same calendar quarter of 2020 with the corresponding quarter in 2019 and demonstrating a decrease of at least 50% in gross receipts. Alternatively, if your gross receipts in a quarter are less than 80% of the gross receipts from the same quarter in 2019, you may also qualify.
- What wages and healthcare costs qualify for the ERTC?
Qualified wages for the Employee Retention Tax Credit include compensation paid to employees, such as salary, wages, and tips. The amount of qualified wages may vary depending on the average number of full-time employees the business had in 2019. Additionally, healthcare costs may also qualify for the ERTC.