How Do I File For The Employee Retention Tax Credit
How to File for the Employee Retention Tax Credit
Filing for the Employee Retention Tax Credit (ERTC) is an easy process that can bring you great tax savings. To get started, check if you're eligible. Then calculate the credit based on your payroll expenses and number of employees. Next, file Form 941 with the IRS. Claim the ERTC on Form 941 by reducing tax deposits or asking for a refund. Record your payroll expenses and number of employees to back up your claim. Don't forget this valuable tax credit! Rules and eligibility requirements can change, so consult a tax pro for the latest info.
Eligibility Criteria for Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a financial aid for employers. It helps cover costs of paying employees during the COVID-19 crisis. To qualify, employers must meet specific criteria. This includes revenue loss thresholds, wages paid and more. We'll explain the eligibility criteria here in more detail.
To be eligible for the ERTC, employers must meet the following criteria:
- Experiencing a significant decline in gross receipts (50% or more) in a single calendar quarter compared to the same quarter in the previous year.
- Employers with 500 or fewer employees may be eligible for the credit.
- The credit amount is based on the wages paid to employees, including healthcare expenses, up to a maximum cap.
- Certain employees, such as family members of the business owner or majority shareholders, are not eligible for the credit.
- Employers who received a PAYCHECK PROTECTION PROGRAM loan are still eligible for the ERTC but cannot use the same wages for both programs.
How to determine the decline in gross receipts?
To measure the drop in gross receipts, businesses must compare the current quarter's gross receipts to the same quarter of the previous year. They can also use another method to compare the current quarter's gross receipts to the average gross receipts from the past year.
Eligibility For Employee Retention Tax Credit:
Businesses must meet certain criteria to be eligible for the Employee Retention Tax Credit. They must have either:
- Experienced a full or partial shut down due to a government-issued COVID-19 order, or
- Have experienced a decline in gross receipts.
Additionally, businesses with an average of less than 500 employees in 2019 are eligible for the credit.
Filing For The Employee Retention Tax Credit:
To file for the Employee Retention Tax Credit, businesses should use Form 941. This form is used to report payroll tax withholdings and the credit should be included on Line 11c.
How to calculate the amount of qualified wages?
To calculate the amount of qualified wages for Employee Retention Tax Credit (ERTC), think about the eligible period, employees, and max credit per employee. Here are the steps:
- Find the eligible period: Between March 13, 2020 & December 31, 2020, max credit = $5,000 per employee. Between Jan 1, 2021 & Dec 31, 2021, max credit = $7,000 per employee per quarter.
- Identify eligible employees: Qualified wages = paid to those eligible for ERTC who are fully or partially unable to work due to COVID-19.
- Calculate max credit per employee: Credit = 50% of wages paid to employee, up to $10,000 in wages per year.
- Add up the credit amounts: Calculate total credit by adding up credit amounts for each eligible employee.
By doing this, you can claim ERTC and get the max benefit.
How to define which employees are qualified to receive the tax credit?
To check eligibility for the Employee Retention Tax Credit, businesses must review certain criteria:
- The employee should have started work before Jan 1, 2021, and stayed employed throughout the period for which the credit is sought.
- Their wages during the claim period must be below a threshold depending on the size of the business.
- The staff must have experienced full or partial closure of operations, or a big fall in earnings due to the COVID-19 pandemic.
- The employee cannot be related to the business owner.
The requirements for the Employee Retention Tax Credit can be tricky and vary with the size and circumstances of the business. It is wise to talk to a tax expert prior to applying for the credit to make sure all conditions are met.
Documents You Need to File for Employee Retention Tax Credit
The Employee Retention Tax Credit originates from CARES Act in 2020. It encourages businesses to keep their staff employed, during the COVID-19 pandemic. To gain this credit, you must provide documents to the IRS. Here is what documents are needed to file for the Employee Retention Tax Credit:
Forms to file and when are they due?
File for the Employee Retention Tax Credit (ERTC)! You'll need specific forms within certain deadlines. Here are the key forms with their due dates:
- Form 941: To report payroll taxes on a quarterly basis, use this form. Claim ERTC on Form 941 for Q2, Q3, or Q4 in 2021. Q2 is due July 31, 2021. Q3 is due October 31, 2021. Q4 is due January 31, 2022.
- Form 7200: File this one ahead of the quarter to request an advance payment of ERTC.
- Form 5884: Use it to calculate and claim the ERTC. File it with your Form 941 for eligible quarters.
Be sure to file accurately and on time. That way, you won't get penalties or delays in receiving ERTC benefits.
Supporting documents for gross receipts and qualified wages calculation
To apply for the Employee Retention Tax Credit, you'll need to provide documents to support your gross receipts and qualified wages calculations. Here are some of the documents you may need:
For gross receipts calculation:
- Quarterly state and local sales tax returns
- Quarterly financial statements or bank statements
- Accounting records if you don't have quarterly financial statements
For qualified wages calculation:
- Payroll records (employee compensation and benefits)
- Documentation of health plan expenses for employees who were not working
- Eligible employer contributions to retirement plans
- State and local taxes on employee compensation
It's vital to keep accurate, organized records to ensure a successful claim for the Employee Retention Tax Credit.
How to claim the credit for advances received?
Claiming credit for advances? You must file Form 941 (Employer's Quarterly Federal Tax Return) for each quarter you received advances and were eligible for the employee retention tax credit.
Documents required for filing:
- Proof of number of employees employed in each quarter.
- Records of qualified wages paid to employees in each quarter.
- Proof of health plan expenses allocated to wages.
- Copy of Form 941 for each quarter claiming the credit.
- Other documents to support eligibility for credit.
You can file using Form 941 or third-party payroll provider.
Pro Tip: Keep relevant documentation and records for 4 years – they may be requested by the IRS for audit.
Steps to Follow When Filing for Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a federal tax credit that employers can claim. This credit helps employers cover wages that have been affected by the pandemic. The IRS has steps to file for this credit. Let's look at them!
Here are the steps to claim the ERTC:
- Review the eligibility requirements.
- Calculate the amount of the credit.
- Submit the claim with the IRS.
Understand the ERTC today!
Choosing your preferred method of filing
Filing for Employee Retention Tax Credit (ERTC) gives you two options:
- Form 941 – Claim ERTC against your payroll tax liability. File it every quarter and report wages paid and tax liability.
- Form 7200 – Request an advance payment of ERTC. File this multiple times during the year, receive up to 70% of anticipated credit.
Steps to follow:
- Check eligibility using IRS guidelines.
- Keep all documentation of payroll expenses and operations.
- Pick best form and file with IRS.
Pro tip: Consult a tax professional for best option and accurate filing.
Filing for retroactive credit for 2020 tax year
To get credit for 2020 taxes, follow these steps:
- Check your eligibility. See if you qualify for retroactive credit under the CARES Act or CAA 2021. This includes a decrease in revenue or government orders linked to COVID-19.
- Gather payroll and tax info. Get the right payroll and tax data from 2020, like Forms 941, 944, W-2, and employer-paid healthcare costs.
- Calculate the credit. Use IRS Form 5884 and directions to work out the credit amount every quarter. Note that the credit can be up to 50% of the first $10,000 in qualified wages per employee.
- File Form 941-X. After figuring out the credit amount and amending the forms, file Form 941-X to get the retroactive credit for 2020.
- Keep records. Keep all calculations, forms, and filings well-documented, as the IRS might audit or review them later.
- Tip – Talk to a tax expert to ensure you qualify for the credit and to help with the filing process.
Claiming the credit on Form 941 and Form 8974
To get the employee retention tax credit, qualified employers must file Forms 941 and 8974. Here are the steps to take:
- Step 1: Check eligibility – Review the criteria to see if you qualify.
- Step 2: Gather documents – Collect payroll records, tax forms, and eligible expenses proof.
- Step 3: Calculate the credit – Utilize the calculations in Form 941 or ask a tax specialist.
- Step 4: File Forms 941 and 8974 – Fill out the forms accurately and submit them to the IRS on time.
- Step 5: Claim the credit on Form 941 – Once Form 8974 is processed, employers will get the credit from Form 941.
Note: You can't claim the employee retention tax credit and the Paycheck Protection Program loan forgiveness for the same wages.
Pro tip: Ask a tax expert to decide the best tax credit strategy for your business.
Common Mistakes to Avoid When Filing for Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a credit for eligible employers. It's a way to reward them for keeping their employees on their payroll in 2020.
To avoid costly and time-consuming errors, it's important to know about common mistakes when filing for the ERTC. Here are some to keep in mind:
Confusing the filing deadline with the extended due date
Making the wrong deadline for the Employee Retention Tax Credit (ERTC) is a common mistake for taxpayers. Here's what you need to know:
- The filing deadline for ERTC is the same as for Form 941 – the last day of the month after the quarter ends.
- You can usually get an extension for Form 941 without having to ask for an extra one for ERTC.
- But, the extension only applies to filing Form 941 – not paying taxes due with it, such as ERTC.
- So, make sure to pay taxes due on time to avoid penalties and interest.
- Professional help when filing for tax credits is always a good idea, to make sure everything's done right and in time, and to get the most benefit.
Including ineligible wages or employees
The Employee Retention Tax Credit (ERTC) is a great way for businesses struggling during the pandemic to get back some of their costs. But, if you include ineligible wages or employees, the IRS could reject your claim. Here are some mistakes to avoid when filing for the ERTC:
- Including wages paid with Paycheck Protection Program funds.
- Claiming wages paid to family members or business owners.
- Claiming wages for employees who worked fewer than 30 hours per week.
- Including wages paid to employees who weren't employed the entire quarter.
Pro Tip: Before you submit your claim, double-check your calculations and eligibility requirements to prevent delays or penalties.
Failing to claim the full tax credit amount
Businesses can make a big mistake when filing for the employee retention tax credit. They fail to claim the full amount! To prevent this, they must:
- Meet eligibility criteria
- Keep accurate records of payroll and employment taxes
- Be familiar with recent changes due to COVID-19
These changes include:
- Tax credit percentage increase to 70% of qualifying wages
- Expansion of eligible businesses
- Higher qualifying wage limit
It is recommended to work with an accountant or tax professional. They can help you navigate these changes and get the full tax credit.
Pro tip: Stay updated on the tax credit rules and regulations to make sure you are not missing out on any benefits.
Frequently Asked Questions
1. What is the Employee Retention Tax Credit (ERTC)?
The ERTC is a tax credit designed to help businesses that were adversely affected by the COVID-19 pandemic to retain their employees. The credit is based on the wages paid to eligible employees.
2. Who is eligible for the ERTC?
Generally, businesses that had a significant decrease in revenue or were fully or partially shut down due to COVID-19 are eligible for the ERTC. However, there are other requirements that must be met, and eligibility can be complicated. It is recommended to consult with a tax professional to determine eligibility.
3. How much can I claim for the ERTC?
The ERTC is worth up to 70% of the first $10,000 in wages paid to each eligible employee per quarter in 2021. This means a maximum credit of $7,000 per employee, per quarter.
4. How do I file for the ERTC?
To claim the ERTC, eligible employers must have their tax professional or payroll provider file Form 941, Employer's Quarterly Federal Tax Return, and claim the credit on this form. The ERTC can also be claimed retroactively for quarters in 2020, by filing an amended return.
5. When is the deadline to file for the ERTC?
The deadline to claim the ERTC for 2020 is April 15, 2021. However, the deadline to file for the ERTC for quarters in 2021 is not yet determined.
6. How soon can I receive the ERTC?
Employers who have claimed the ERTC can receive it as a refund by reducing their payroll tax deposits, or they can apply it to future payroll tax deposits.