What You Need to Know About the ERTC Tax Credit
The Earned Income Tax Credit (EITC) is a federal tax credit that can help taxpayers receive a refund or reduce the amount of taxes they owe. This tax credit is available to low and moderate-income individuals and families who meet certain criteria. This section will provide an overview of the EITC, including:
- Eligibility requirements
- The amount of the credit that you may be eligible for.
Overview of the ERTC Tax Credit
The Employee Retention Tax Credit (ERTC) is a refundable federal tax credit available to eligible employers to help offset the economic impact of COVID-19. Under the CARES Act, employers that have been impacted by COVID-19 may qualify for an ERTC of up to $5,000 per employee. This credit applies only to employers who are fully or partially suspended due to government orders related to COVID-19, or if gross receipts are significantly reduced for a certain period.
Eligible employers can apply for the ERTC through the Form 941 quarterly payroll tax return and Form 7200 advanced payment request form. Eligible employers will receive an immediate refund based on their ERTC payments and can claim their credit against 2020 employment taxes throughout 2021 and 2022. The exact amount of the refund depends on numerous factors such as wages paid, number of employees and whether or not company operations have been affected by government shutdowns.
Additionally, any qualified wages paid between March 13, 2020 and December 31, 2020 will be eligible for a general business credit of 70% up to a maximum allowable amount which is determined by each employer’s situation. The remaining 30% can be applied towards 2021 employment taxes which are free from payroll taxes including Social Security (FICA), Medicare (FICA) and FUTA taxes. The allowance limits vary depending on total wages paid during that period as well as other factors such as company size and number of employees retained at full salary levels during that time period. There may also be additional limitations if your employer has already received other relief funds such as PPP or EIDL loans in 2020 through 2021 following the CARES Act guidelines.
Individuals may be eligible for the Earned Income Tax Credit (EITC) if they meet certain requirements, such as having earned income from employment, self-employment, or certain disability benefits. Additionally, the individual must have a valid Social Security Number; file as Single, Head of Household or Married Filing Jointly; and reside in the US for more than half of the tax year.
In addition to these eligibility requirements, individuals must meet certain rules when claiming the EITC depending on their filing status and whether they are claiming any qualifying children. Generally, taxpayers must meet all three of the following requirements in order to qualify:
- Earned Income – Individuals must have some type of earned income including wages, salaries and tips from work performed. They may also include net earnings from self-employment such as rents or business profits.
- Investment Income – Investment income is limited to $3,600 per year per family or $1,800 for married people filing separately. This includes interest and dividends from stocks and bonds as well as royalties that have been reported on a tax return.
- Modified Adjusted Gross Income (AGI) – This is based on your adjusted gross income (AGI) plus any tax exempt interest received minus certain deductions allowed by law. For most taxpayers with three or more qualifying children who are claiming EITC will be in excess of $50,000 AGI limit to claim this credit.
In order to gain eligibility for EITC individuals must meet income and other requirements at specific times during the year—the day their child was born for example—as well being part of a household that consists of spouses living together or at least one dependent child living in your household for more than half the year. Finally individuals cannot prevent someone else from being claimed as a dependent on another taxpayer’s return and can not choose zero withholding due to poor health during any part of that taxable year to be eligible for this credit.
Benefits of the ERTC Tax Credit
The Employee Retention Tax Credit (ERTC) is a refundable tax credit available to employers who keep their employees on the payroll during the pandemic. This tax credit helps employers reduce their payroll expenses and provides incentives to keep their employees working.
Let's take a look at the benefits of the ERTC tax credit:
The Employee Retention Tax Credit (ERTC) is a refundable federal tax credit available to employers that are impacted by the COVID-19 pandemic. The purpose of this credit is to help employers keep employees on their payroll during, and in some cases, shortly after the pandemic. When calculating the amount of any eligible employer’s ERTC claim, significant tax savings can be obtained that are worth knowing about.
For example, an employer may be able to receive an employee retention tax credit of up to 50% of up to $10,000 of wages paid by an eligible employer in 2020. Furthermore, if an eligible employer is unable to fully use their ERTC due to insufficient taxes otherwise due during the calendar year and quarter for which the ERTC was determined for the two preceding calendar years (2018 & 2019), then any qualified wages paid in 2021 will still be eligible for a similar credit up to 80%.
Other benefits from claiming this credit may be available too, depending on your specific situation. For example, a larger ERTC may also reduce self-employment taxes or increase any available health insurance credits/payments from certain government programs taken into consideration in determining eligibility for those same government programs. Additionally, claiming this credit may also allow for annualized calculations on quarterly 941 return filings that could potentially reduce net income tax liability even further when taking other credits into consideration as well. Moreover, certain components associated with the FFCRA or CARES Act could also result in greater savings when claimed together in combination with this employee retention tax credit.
It’s always best practice to consult with your financial and/or legal advisors when exploring ways to maximize your benefits and efficiency with each quarter and filing cycle; however it’s important also to note that all potential opportunities should be considered before they expire – as many programs related or unrelated provide great incentives and feature dates that could potentially expire without proper planning.
Increased Cash Flow
The ERTC Tax Credit can help businesses cover a portion of the wages paid during the pandemic and is designed with cash flow in mind. Companies may apply for reimbursement for employee wages, regardless of the size of their business. Depending on the size of the business and its payroll costs, companies can receive up to $7,000 per employee or $5,000 per quarter in tax credits over a two-year period.
In addition to providing financial support when it’s needed most, this tax credit provides greater flexibility in how businesses spend their money. Since the decision to take advantage of this tax credit does not require an additional expense outlay from your business, it can help enhance cash flow and make other investments possible.
Furthermore, eligible employers are allowed to claim up to 700% more in refunds than previously allowed through existing payroll tax credits like Work Opportunity Tax Credit (WOTC) and Family First Coronavirus Response Act (FFCRA) credits. This means that businesses may be able to maximize refunds while minimizing out-of-pocket payments.
Improved Employee Retention
The Employee Retention Tax Credit (ERTC) offers a flexible and powerful incentive for businesses that have been affected by the COVID-19 pandemic to keep their employees on payroll. The ERTC is a payroll tax credit available to employers equal to 50 percent of qualified wages paid during the period from March 13, 2020, through December 31, 2020. Qualifying wages paid include those provided to retain employees who would otherwise have been laid off or experienced pay reductions due to business disruptions caused by the pandemic.
This tax credit directly improves employer retention efforts by providing direct financial assistance to businesses that are struggling with the costs associated with retaining their employees during this difficult economic time. Not only does it provide an effective way for businesses struggling during the pandemic earn back some of their spending in the form of tax credits, it also provides an incentive for employers looking to see increased employee retention over time as wages are progressed beyond those used in calculating this tax credit. This allows companies leverage on costs associated with training up new personnel while maintaining an experienced workforce over a longer period of time where they could not afford it previously.
How to Claim the ERTC Tax Credit
The Employee Retention Tax Credit (ERTC) is a new tax incentive available to employers to help alleviate the financial impact of the COVID-19 pandemic. Employers who have experienced business closures or a decline in gross receipts may be eligible for a refundable payroll tax credit for eligible wages paid to employees from March 13, 2020 through December 31, 2020.
This article will provide an overview of the ERTC and the steps employers can take to claim the credit:
The Employee Retention Credit (ERTC) is a refundable tax credit designed to encourage businesses to keep employees on their payroll during the COVID-19 pandemic. To be eligible for the ERTC, employers must have experienced full or partial suspension of operations as a result of a governmental order or have experienced a significant decline in gross receipts.
Eligible employers may claim the ERTC by completing and filing an IRS Form 941: Employer’s Quarterly Federal Tax Return each quarter. To determine eligibility for the credit, employers should consider several factors including their size, operations and gross income.
- Size: Eligible employers are those with greater than 500 employees in 2019 OR those that employ 100 or fewer full-time employees in 2020.
- Operations: Employers must have suspended operations due to government orders OR must have suffered a reduction in gross receipts of more than 50%.
- Gross Income: Gross receipts are considered “gross” if they do not include revenue from government relief payments such as small business loans, grants, subsidies and money granted under the CARES Act.
It is important to note that certain employers may be ineligible for the ERTC regardless of whether they meet any of these criteria. These include federal, state and local governments; remuneration paid primarily for services related to medical care; and remuneration paid after December 31, 2020. Also keep in mind that there are special rules for partnerships and other pass-thru businesses so it's important to consult with your tax advisor before claiming the credit on your return form.
Calculate the Credit
Calculating the ERTC tax credit is done with the use of Form 941, Employer's Quarterly Federal Tax Return. The form requires employers to provide information regarding their employees' wages and taxes during the quarter, as well as its employer identification number.
On Line 17a of Form 941, employers will be required to calculate their total Qualified Wages for claiming the ERTC tax credit. Qualified Wages are calculated by taking into account an employee’s wages that were included in Social Security withholding (ie: Medicare part A taxes) for up to $10,000 for each eligible employee for each quarter. Any further wages of the same employee do not qualify for inclusion in the calculation of Qualified Wages for claiming this credit.
The employer must also enter its qualified health plan expenses on Line 17b to determine its allowable tax credit amount which is then added to Line 16a-Q of Form 941 when filing a quarterly return with the IRS. Employers may take up to 50% of qualified health plan expenses as a tax credit against their Social Security Taxes (FICA) not exceeding $5,000 per eligible employee per quarter or $20,000 over a four-quarter period. The remaining eligible expenses can then be deducted against ordinary income taxes and will continue until they are fully used up.
It's important that employers consult an experienced accountant before calculating their qualified wages and expenses in order to ensure accuracy and maximize any potential savings that may be gained through this program.
File the Required Forms
If you are eligible to claim the ERTC tax credit, you must file the appropriate forms with your income tax return. To receive the credit, you must submit the applicable Form 1040 or Form 1040-SR. The specific form used will depend on whether you are an individual taxpayer, married filing jointly, head of household, etc.
In addition to your personal income taxes form, also add Form 6765 to your return. This form allows taxpayers to figure and claim their calculated ERTC amount for qualified expenditures related to research and development activities performed in 2020 and 2021.
Form 1120S is available for businesses that choose to use a different method of calculating certain amounts related to their ERTC credit calculation. This can't be used by most individuals and shouldn't be used unless you are sure it’s appropriate in your case.
Certain qualifying activities may generate additional paperwork that needs to be submitted with your tax return as well in order to receive the full benefit from the ERTC tax credit. Examples of these documents include Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities) and/or receipts for qualified research expenses on Schedule C (Form 1040) or Form 4562 (Depreciation). If needed, attach all relevant documents detailing any applicable benefits when submitting your income taxes.
Tips for Maximizing the ERTC Tax Credit
The Employee Retention Tax Credit (ERTC) is a benefit offered by the IRS to businesses that have been impacted negatively by the coronavirus pandemic. This credit can help businesses save money on their taxes, but there are some steps you need to take to be eligible for the credit.
In this article, we will discuss some tips for maximizing the ERTC tax credit:
Maximize Qualified Wages
In order to maximize the amount of credit your business could receive with the Employee Retention Tax Credit, it’s important to understand what wages qualify. Qualified wages are limited to certain thresholds related to the average number of full-time employees in your business and are based on either:
- Focusing on what each individual employee is paid in a given quarter, or
- Focusing on total wages paid by an employer for all its employees in a given quarter.
Each of these approaches will result in different Qualified Wages, which can have a significant impact on the value of the credit received.
For employers with 100 or fewer full-time equivalent employees (less than 100 FTE): Qualified Wages when focusing on each employee are limited to $10,000 per employee for all quarters of 2020 and 2021 combined. Within any calendar quarter, these wages cannot exceed $4000 per quarter from any single employee.
For employers with more than 100 FTEs: Qualified wages are limited to 70 percent of an employee’s regular wages for each individual quarter plus any allocable qualified health plan expenses allocated to those regular wages for that same quarter paid 10/1/19 – 3/31/20. For any calendar quarter in 2021, qualified wages cannot exceed $10,000 from any single employee.
Take Advantage of Carryback Provisions
Taxpayers can potentially maximize their credits by taking advantage of the carryback provisions. This could involve filing amended returns for prior taxable years to claim ERTC credit amount not originally taken in the current year. Taxpayers can also renounce the ERTC’s current year utilization, essentially allowing a later taxpayer to make use of this benefit on a future tax return instead.
The ability to claim current year ERTC losses or credits is based on the net operating loss (NOL) limitation rules located section 172 of the Internal Revenue Code (IRC). Generally, only business taxpayers with less than $25 million in average annual gross receipts for three preceding consecutive taxable years are eligible for an NOL deduction, and must be computed separately from any regular NOL deduction. However, even if an employer has gross receipts greater than $25 million, they still may qualify for reduced deductions under certain circumstances. Moreover, employers with unlimited NOL deductions or suspended limitations due to insolvency may have additional considerations when claiming their ERTC tax credits.
Overall, it’s important that employers not overlook opportunities either in their current tax returns or amended returns where utilizing carryback provisions allow them to maximize their benefit from available credits such as the ERTC. A qualified tax advisor should be consulted before making these decisions who understands both your specific industry sector as well as applicable rules and regulations to ensure proper filing and claiming prerequisites are met.
Consider the Alternative Minimum Tax
When planning for the ERTC tax credit, it is important to consider whether Alternative Minimum Tax (AMT) could be triggered. The AMT is an alternative calculation of a taxpayer’s tax liability based on allowances and exclusions from regular tax computation, such as earned income credits or NOLs.
For companies that are subject to the AMT, the use of certain credits can raise their overall effective tax rate. The ERTC tax credit may have the same effect since it reduces regular taxable income and tax liability. As such, companies should take the time to examine their potential exposure to AMT before claiming any benefits from the ERTC credit.
It is also important to consider that corporations filing a consolidated return cannot use most of their existing credits under the AMT exception because those credits are only allowed on separate returns due to dual tier legal restrictions. In this great case, corporations would need to decide between:
- taking full advantage of existing available benefits
- potentially risking higher taxes through utilization of ERTC or other benefit programs that aren't excluded under AMT computation rules.
After reviewing the benefits of the ERTC tax credit, its potential to help businesses and employees make it an attractive option. Although it is complex, businesses that go through the effort to apply for and receive the ERTC tax credit can enjoy a substantial financial reward. This can be a great way for businesses to offset their expenses, ensuring that their financial stability is maintained during this unprecedented time.
Summary of the ERTC Tax Credit
The Employee Retention Tax Credit (ERTC) is a valuable tax break for employers in response to the COVID-19 pandemic. It allows employers to receive a refundable credit equal to 50% of up to $10,000 in wages per employee per quarter if their operations have been disrupted due to measures related to the pandemic.
To qualify for the ERTC, employers must meet eligibility criteria such as having fewer than 500 employees and a 20% decrease in gross receipts compared to the same quarter of 2019 or the same quarter of 2020. Employers that meet the eligibility criteria can claim up to $5,000 for each eligible employee for wages paid between March 13, 2020 and December 31, 2020.
In sum, the ERTC Tax Credit is an invaluable source of financial relief available to small businesses affected by COVID-19. It helps employers keep their employees on payroll during difficult times and allows them to recoup some lost profits through tax credits up to $5,000 per employee per quarter. Although employers should familiarize themselves with all of the eligibility criteria before applying for this tax credit, it provides an excellent opportunity for many businesses facing economic hardship during this tumultuous period.
Resources for More Information
Completing the application and certification process for the Employer Tax Credit (ERTC) is a time-intensive endeavor and understanding requirements is essential. Employers who are considering taking advantage of this benefit might find the following resources useful when preparing the necessary paperwork:
- Internal Revenue Service: The IRS website offers detailed information, frequently asked questions (FAQs), webinars and required forms. They also provide guidance on determining which employees qualify for assistance, calculating wages, and other aspects of the application process.
- U.S. Department of Labor: While not directly related to employer tax credits, DOL provides tools to help employers calculate federal wages that should be included in ERTC applications, along with compliance assistance to help businesses stay up-to-date on all relevant labor laws.
- National Association of Certified Public Accountants: NACPA provides resources such as ERTC webinars that are informative and easy to understand for novice business owners who are new to filing taxes or claiming credits. They also provide important tactics and strategies that employers can use when seeking more financial assistance due to updated disaster relief provisions from changing circumstances in the economy or government policy shifts.
Frequently Asked Questions
Q: What is the ERTC tax credit?
A: The Employee Retention Tax Credit (ERTC) is a refundable tax credit that provides businesses with a financial incentive to keep employees on the payroll during the COVID-19 pandemic. The ERTC allows employers to claim a tax credit of up to 50% of qualified wages, if an employee's wages were reduced due to the pandemic.
Q: Who is eligible for the ERTC tax credit?
A: The ERTC tax credit is available to businesses, tax-exempt organizations, and certain self-employed individuals that have experienced either a full or partial suspension of their operations due to the coronavirus pandemic, or have seen a significant decline in their gross receipts. Eligible employers must have fewer than 500 employees.
Q: How does the ERTC tax credit work?
A: The ERTC tax credit allows employers to claim a tax credit of up to 50% of qualified wages, not exceeding $5,000 per employee, if an employee’s wages were reduced due to the pandemic. The credit is also refundable, which means employers will receive a refund if the amount of the credit exceeds the taxes they owe. The credit is available for wages paid from March 13, 2020, through December 31, 2020.