How to Determine if You’re Eligible for the ERTC Tax Credit in
The Earned Income Tax Credit (EITC) is a program designed to help low-income households save money on their taxes. It is one of the largest sources of poverty reduction in the United States. In 2021, the EITC has been expanded, making it easier for more individuals and families to qualify and benefit from the tax credit.
Let's look at the eligibility requirements and how to calculate if you qualify:
What is the ERTC Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit for employers who retain staff and employer payroll taxes – even after experiencing economic hardship caused by the coronavirus (COVID-19). It is available for qualifying employers affected by the COVID-19 pandemic that experience business operations fully or partially suspended due to governmental orders limiting commerce, travel, or group meetings due to COVID-19.
The ERTC is equal to 50% of qualified wages paid to employees up to $10,000 per employee. This includes both wages paid from March 13, 2020 through December 31, 2020. Employer’s also have the option of taking the credit every quarter if desired. The credit can be claimed for employees on any payroll other than those covered by a PPP loan. Therefore if an employer received a PPP loan and used all those funds towards qualified costs then they may be eligible to claim ERTC for certain employees that were not part of their PPP loan coverage.
In order to qualify for this tax credit employers must meet certain criteria laid out by the government including:
- Having gross receipts decline by more than 20% in a quarter in 2020 compared to 2019
- Meeting certain wage limits as determined by years and size of employer
- Filing Form 941 quarterly and keeping proper records of wages paid and amount of qualified health plan expenses paid or incurred during the same period being reported on Form 941.
Additionally, employers may also qualify based on special circumstances such as experiencing significant decline in stock price compared with their value prior to February 2020; or experiencing full or partial shutdowns due to government orders limiting commerce due to COVID-19 related health concerns.
Who is eligible for the ERTC Tax Credit?
The Employee Retention Credit (ERTC) is a refundable tax credit available to employers as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The credit is intended to help businesses cover wages paid during the COVID-19 crisis. The credit applies to qualified wages paid from March 13, 2020, through December 31, 2021.
To be eligible for the ERTC tax credit, an employer must meet any one of the following criteria:
- Have partially or fully suspended business operations at any point during 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19
- Experienced a significant decline in gross receipts during any quarter of 2020 compared to 2019
- Have partly or entirely stopped operations due to economic hardship caused by the coronavirus pandemic
Employers who are eligible for this tax break may be able to receive up to $5,000 per employee per quarter in credits against their employer Social Security taxes. This can provide much-needed financial relief for companies that have been economically hard hit by the global health emergency.
The earned income tax credit (EITC) is a credit available to taxpayers who earned low or moderate incomes in 2021. To qualify for the EITC, taxpayers must meet certain income and other eligibility requirements.
This section will discuss the eligibility requirements for the earned income tax credit in 2021:
Must have an employee retention credit
To qualify for the Employee Retention Tax Credit (ERTC), you must meet the following requirements:
- You must have an employer identification number in good standing with the Internal Revenue Service (IRS).
- Your business must have been impacted by government orders due to the COVID-19 pandemic, including orders related to social distancing, business closures and restrictions on mass gatherings.
- You must have had an average of either:
- 100 or fewer full-time employees in 2020 or
- 100 or fewer full-time equivalent employees in 2020.
- You can claim the credit from March 13, 2020 through December 31, 2021 for wages paid after March 12, 2020 for qualified wages and health care costs paid or incurred during any calendar quarter of 2021.
- You cannot receive financial assistance from the Small Business Administration's Paycheck Protection Program (PPP) for wages that are eligible for the ERTC as these wages would be double counted as “qualified wages” towards both programs at once. However, you may be able to reduce unused PPP loan forgiveness amounts resulting from using ERTC calculating methods while still computing total ERTC amounts on a calendar quarter basis rather than PPP period basis if you are ineligible to claim the entire amount of each qualifying expense due to timing differences between PPP loan forgiveness eligibility and the ERTC's credit calculation window.
Must be an eligible employer
Under the Employer Retention Credit (ERC) program, employer eligibility is based on the following criteria:
- The business or non-profit must have either fully or partially closed operations due to COVID-19 health directives, OR have experienced a significant decline in gross receipts. To be classified as a significant decline in gross receipts, an employer’s quarterly gross receipts must be less than 80% of the same quarter in 2019.
- The employer must have been—and still is—in business on or after February 15, 2020.
- Businesses that became profitable after February 15, 2020 and received assistance from certain federal programs including 1112 Targeted EIDL advance amounts are NOT eligible for ERC.
- In addition, employers can qualify for the advanced ERC payments if they successfully attest to the release of Letter 6582C by addressing all applicable questions within Form 7200 and its applicable sections with an affirmative response.
Must have experienced a decline in gross receipts
In order to qualify for the 2021 Employee Retention Tax Credit, businesses must have experienced:
- A full or partial suspension of operations due to government orders related to COVID-19; OR
- A decline in gross receipts of at least 20 percent compared to the same period in 2019.
The 2021 Employee Retention Tax Credit applies to employers with fewer than 500 employees, including full-time and part-time workers, who were retained either during the period when the business was suspended due to government orders or during the period when it had gross receipts that declined by at least 20% compared with 2019.
In order for employers affected by either of these conditions (suspension or decline) in 2020 and into 2021, they must determine their eligibility each quarter by comparing its gross receipts from either the same calendar quarter in 2019 or from 2020. The employer may receive a credit for each employee for a maximum of two quarters:
- The first quarter ( February – April 2021) that results in at least a 20% decline in gross receipts.
- The second quarter (May – July 2021 ) that has declines that are greater than 50% compared with 2019 if qualified in first quarter or less than 50% decline if qualified based on suspension during first quarter.
Additionally, employers should note that they are only eligible if they were an ongoing trade or business on March 12th, 2020 and before January 1st, 2021. Employers must also document records such as purchase orders and affidavits as evidence of their gross receipts decline due to government orders related to COVID-19; OR due to having less business activity than usual as shown within documents like payroll reports, tax forms and banking statements.
If you are looking to maximize the return of your 2021 taxes, the Earned Income Tax Credit (EITC or EIC) is an important credit to understand. The EITC provides a significant tax-free refund to eligible taxpayers who have earned income. The EITC is available for taxpayers who meet certain requirements, such as income and filing status.
In this article, we will discuss the benefits of claiming the EITC, how to determine eligibility and how to calculate the amount you are eligible for:
Maximum credit per employee
The maximum amount of the Employer Retention Credit an employer may claim per employee is $5,000. The employer must prorate the amount among all calendar quarters in 2021 that the credit is available, to ensure the total credit claimed per employee does not exceed $5,000. This means an eligible employer can claim up to a maximum of $1,250 for each quarter per employee for a total of $5,000.
The employer will be eligible to claim at least 50% of qualified wages paid up to the limit set for each quarter. An employer may not receive more than 50 % of qualified wages for any given calendar quarter in 2021 for any particular employee, regardless of whether or not multiple credits are available that would otherwise make the total equal to more than 50%.
Credit for wages paid to employees
In 2021, employers may take advantage of the Employee Retention Credit (ERC) tax credit to recoup up to $28,000 per employee in qualified wages paid after March 12, 2020 and before January 1, 2021. The qualified wages can include healthcare benefits and can total up to $10,000 for each calendar quarter for employees whose services are not provided due to:
- Governmental orders related to COVID-19
- A full or partial suspension of operations due to COVID-19
- A decline in gross receipts of 50% or more compared to the same quarter in the prior year.
The amount of the credit will depend on how much you pay your employees during that period:
- If you pay at least $5,000 in wages/benefits in any calendar quarter after March 12, 2020, you’ll be eligible for a credit equal to 50% (up to $5,000) of payroll costs for each employee for that period.
- If you pay at least $15,000 in wages/benefits during any calendar quarter after March 12th and before January 1st 2021, you’ll be eligible for a credit equal to 70% (up to $14,000) of payroll costs for that period.
In addition, employers may also receive an additional credit equal to 100 percent (up top 1040 dollars per day per employee) of federal taxes imposed on qualified Family First Coronavirus Response Act leave payments. This additional credit is available only if they cover family leave while they are not providing services due to either item 2 or 3 listed above.
Credit for health plan expenses
The Employer Retention Credit (ERC), authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, may be available to employers of all sizes who are experiencing revenue declines due to the coronavirus pandemic and maintain certain eligibility requirements. The credit is a fully refundable 50% tax credit available from January 1 through June 30, 2021 for eligible employers paying certain health plan expenses. Employers can claim up to $7,000 for each employee whose health plan expenses were incurred during the applicable period.
To be eligible for the ERC health plan expenses credit, an employer must:
- Be subject to an order from a government body that wholly or partially suspends its business operations due to COVID-19 or experience a decline in gross receipts of more than 20% when compared with the corresponding quarter in 2019
- Incur qualified health plan expenses during the applicable periods (January 1–June 30, 2021). Qualified plan expenses are those that are paid or incurred during such periods on behalf of employees who are either laid off due to COVID-19 or have their hours significantly reduced as a result of government orders responding to COVID-19.
- Have no material unpaid overdue taxes
Eligible employers may claim 50% of their qualified health plan expenses up to $7,000 per employee per calendar quarter through June 30th 2021. Eligible employers should continue to make their quarterly payments as normal in order for them to qualify for the credit.
How to Claim the ERTC Tax Credit
The Employee Retention Tax Credit (ERTC) program was created to help struggling businesses retain their employees during the pandemic. Eligible employers can claim a tax credit of up to 70% of the qualified wages paid to their employees from March 12, 2020, through December 31, 2021.
This article will cover how to claim ERTC tax credit and its eligibility criteria:
File Form 941
Employers, both self-employed persons and entities, are eligible to claim the Employee Retention Credit (ERTC) for 2021 when they file their quarterly 941 form. The credit is generally available to employers who have experienced a full or partial suspension of business operations due to orders from COVID-19 state or federal authorities.
When filing Form 941 in order to claim the ERTC, employers must provide information about their:
- eligible wages paid to employees
- qualified health plan expenses that may be included in the ERTC calculation
- applicable tax credits received related to other coronavirus relief legislation.
In addition, employers must also include information about their gross receipts before and during suspensions of business operations along with other pertinent details related to filing the form. It is important for employers claiming ERTC tax credits in 2021 that all information provided is accurate and complete per IRS guidelines due to newly enacted penalties for fraudulent claims.
Claim the credit on Form 941
If your business is eligible for the ERTC tax credit, you will be able to claim it on form 941. This is an Internal Revenue Service (IRS) form that employers use to report employee wages, withholdings, and credits for each quarter of the calendar year.
Claiming the ERTC tax credit on Form 941 requires completing Schedule A. Here you’ll enter both deductible wages and the total qualified wages used in calculating the ERTC you are claiming. Keep in mind that you may only claim up to 50% of your Social Security taxes withheld against these expenses – whichever is less.
When claiming the credit on Form 941, businesses must also use different payroll tax forms associated with this specific tax break:
- Form 7200 to request advance payments of the credit;
- Form 945 to report federal income tax withheld;
- Form 1099-MISC if necessary; and
- Form 1099-NEC if necessary.
These forms can be completed online or by mail but must be filed with your regular Form 941 filing. If any adjustments related to this credit arise during the year, they too can be reported using a revised version of form 941 as well as amended versions of Forms 7200,1099, and 1099-NEC (if applicable). Though claiming this tax break may seem complicated due to its requirement for reporting and filing paperwork with multiple forms it may significantly reduce your small businesses taxes owed depending on eligibility thresholds met and total qualified expenses claimed against it.
Claim the credit on Form 940
The credit is claimed on Form 940, Employer’s Annual Federal Unemployment Tax Return, in Part 3. Employers should use their calculation worksheets, provided with the form, to determine how much ERTC they can receive. This includes the total eligible wages and health coverage costs for each quarter of the year. When claiming multiple credits, employers need to make sure they are filing Form 9408 correctly with the IRS.
To claim the ERTC tax credit, employers must complete all lines of Form 940 and calculate their FUTA tax liability before taking any credits or deductions in Part 3. In line 16 of Part 3, enter “ERTC” in the first column and then enter your total eligible wages for each quarter of 2021. The maximum amount that can be claimed per employee quarterly is $7,000 ($28,000 a year). For line 17b in Part 3, enter your health coverage costs that would have been incurred if it had been paid by an employer-sponsored health plan (ESHP). Do not include payroll taxes or other expenses related to ESHP coverage that have already been included as eligible wages in line 16. To be eligible for the ERTC for health plan costs in a particular quarter employers must report at least $10k of qualified wages with no cap on amount of qualifying expenses related to health coverage costs reported on line 17b.
When complete and all documents are submitted accordingly with Form 940 employers should receive information from their state agency determining if they qualify for unemployment insurance dues and subsequently allowing them to receive benefits associated with this program including the ERTC Tax Credit as determined by their state's guidelines as well as federal regulations related to UI/Unemployment Insurance.
The Earned Income Tax Credit (EITC) can provide a financial boost for eligible taxpayers. In 2021, taxpayers may be able to receive up to $6,660 in tax credits with the EITC. To find out if you qualify for this credit and to learn more information about it, there are a number of additional resources available.
This section will cover a few of the key resources that can help you understand more about the EITC and the 2021 eligibility requirements:
IRS ERTC Tax Credit FAQs
The Employee Retention Tax Credit (ERTC) is designed to encourage businesses to keep employees on the payroll during the COVID-19 pandemic. It is a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to certain employees after March 12, 2020, and before Jan. 1, 2021.
Here are some frequently asked questions regarding this credit:
- Q: What types of employers are eligible?
A: Generally, all employers whose operations were suspended due to a governmental order limiting commerce, travel or group meetings due to COVID-19 or who experienced a significant decline in gross receipts may be eligible for ERTC tax credits. For more information about eligibility and the required documentation for proof of eligibility claim your ERTC tax credit, please reference Internal Revenue Services (IRS) Notice 2020-23 [link] and Publication 15-B Employer’s Tax Guide To Fringe Benefits.
- Q: Are there any limits on how much credit an employer can get?
A: The maximum amount of wages eligible for the credit is limited annually per employee. An employer's total annual allocation of qualified wages per employee cannot exceed $10,000 per calendar year.
- Q: What are qualified wages?
A: Qualified wages generally include those paid by an employer to an employee while operations have been partially or fully suspended by government order or while gross receipts fell below 50% as compared to similar quarters in 2019. In addition, during periods when operations have not been suspended nor did gross receipts drop, qualified wages generally consist only of those paid to an employee who was not providing services due to COVID-19 related circumstances such as hospitalization, quarantine expenses or caring for family members who were quarantined due to coronavirus related decisions made by their employers. For detailed information regarding what constitutes qualified wages please refer to IRS Notice 2020-23 [link] and Publication 15-B Employer’s Tax Guide To Fringe Benefits.
For additional information regarding filing deadlines and other important information about ERTC eligibility requirements please reference IRS Notice 2020-23 [link] and Publication 15-B Employer’s Tax Guide To Fringe Benefits [link]. If you need assistance with understanding any part of this process please reach out our customer service team who will be happy provide further guidance.
IRS ERTC Tax Credit Worksheet
The IRS Employee Retention Credit (ERTC) takes the form of a tax incentive for businesses affected by the COVID-19 pandemic. Eligible employers may be able to claim this credit to boost their bottom line and help keep their employees on board during an uncertain economic time. The ERTC is claimed on the IRS Form 941, Employer's Quarterly Federal Tax Return for each quarter that the business was eligible for and received the credit.
In order to claim this credit, businesses must have had operations suspended or experienced significant revenue decline due to governmental shutdowns as a result of COVID-19 in 2020 or 2021. The amount of credits available is based on your company’s average monthly number of full-time employees in 2020 and wages paid in each quarter in 2020 or 2021. To assist taxpayers with calculating their ERTC amounts, Treasury released the ERTC Tax Credit Worksheet which explains how to calculate it correctly and correctly report it on Form 941.
To calculate your ERTC amount using an eligible employee’s wages, businesses should use their average number of full-time employees per month during 2020, multiplied by ($5,000) for each quarter in 2020 and multiplied by ($7,000) for Q1 2021 and ($8,000) Q2 2021; then divide by 12 (months). Additionally, businesses can also include state taxes imposed on employee wages paid up to specified limits.
IRS ERTC Tax Credit Calculator
Employers who are eligible for the Employee Retention Credit (ERTC) can use an IRS ERTC tax credit calculator to estimate how much they might be able to save. The ERTC is a temporary tax credit that was created in response to the coronavirus pandemic and allows employers to claim up to $5,000 per employee. To qualify for the credit, businesses must have experienced a reduction in gross receipts of greater than 20% between 2019 and 2020.
The IRS has provided an online calculator that can help employers understand how much they may be eligible for based on their business’s records. The calculator walks employers through a series of steps, starting with identifying whether the business is eligible under one of two categories:
- Qualified Businesses – these are businesses that have suffered more than 20% decline in gross receipts; OR
- Qualified 501(c)(3) Nonprofit Organizations – organizations that meet certain specifications as outlined by the Internal Revenue Service (IRS).
It then asks for specific details about the business such as total number of employees, average wages & number of seasonal employees, before arriving at an estimate. Employers should note, however, that this is only a rough estimate and actual results may differ. Employers also need to confirm their eligibility every quarter before claiming the credit under quarterly payments or filing Form 941 with Form 5884-A. It is also important to go through all regulations pertaining to this tax credit carefully before filing any returns or making any claims with regards to it. This will help you avoid any potential penalties or mistakes in computation.
Frequently Asked Questions
Q1: Who is eligible for the ERTC Tax Credit in 2021?
A1: Eligibility for the Employee Retention Tax Credit (ERTC) in 2021 depends on a variety of factors such as the size of the business, wages paid to employees, and the amount of revenue lost during the pandemic. Generally, businesses that have experienced a significant decline in gross receipts compared to the same period in 2019 are eligible to claim the credit.
Q2: What are the requirements to qualify for the ERTC Tax Credit in 2021?
A2: To qualify for the ERTC Tax Credit in 2021, businesses must have experienced a significant decline in gross receipts for the same quarter in 2020 compared to the same quarter in 2019. Employers must also have paid wages to employees during the period in which their business was experiencing the decline in gross receipts.
Q3: How can I claim the ERTC Tax Credit in 2021?
A3: To claim the ERTC Tax Credit in 2021, eligible employers must file Form 941, the Employer’s Quarterly Federal Tax Return, with the IRS and include the ERTC amount on the form. Employers must also submit Form 7200, the Advance Payment of Employer Credits Due to COVID-19, with their Form 941 to receive the advance payment of the credit.