How to Apply for the Employee Retention Tax Credit
The Coronavirus Aid, Relief, and Economic Security (CARES) Act offers businesses a much-needed lifeline in the form of the Employee Retention Tax Credit. This tax credit can be incredibly beneficial to any business struggling due to the pandemic, but many business owners may not know how to apply for it. In this blog post, we'll walk you through the process and provide all the information you need to make sure your business takes advantage of this credit!
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit is a tax credit available to employers who retain employees for at least 180 days in the current tax year. Employers can claim this credit on their taxes if they have paid qualified employee wages during the tax year and had at least 1,500 qualifying full-time equivalent employees during the preceding two years.
To qualify for the Employee Retention Tax Credit, an employer must meet all of the following requirements:
- Pay qualified employee wages during the tax year. Qualified employee wages are defined as regular pay, overtime pay, commissions, tips, bonuses or other forms of compensation that are ordinarily included in an employee's regular salary.
- Have at least 1,500 qualifying full-time equivalent employees during the preceding two years. A qualifying full-time equivalent employee is someone who worked a total of 30 hours per week or less over the two years and was employed on average 25 hours per week during each of those years. Part-time employment counts as part time for purposes of calculating whether an employer has met this requirement.
- File Form 8844 with your Taxes using IRS efile to claim this credit against your federal income taxes . You don't need to file Form 8844 if you're claiming any other credits or deductions on your taxes (like the Child Tax Credit).
Who Qualifies for the Employee Retention Tax Credit?
The Employee Retention Tax Credit is a tax incentive designed to encourage employers to keep workers on their payroll. To qualify for the credit, an employer must retain at least 50% of its full-time employees (defined as those who have worked at least 420 hours during the year) from the previous calendar year. The amount of the credit is based on how many employees are retained and varies depending on the employee's salary level. Low-income employees may be eligible for a larger credit than high-earners.
To be eligible for the credit, an employer must file Form 8853, Employee Retention Credit. The form includes detailed information about each employee who was retained and their salary level. Generally, all companies with at least one employee who earned $50,000 or more in income during the previous calendar year are required to file Form 8853 irrespective of whether they plan to claim the credit or not. However, certain small businesses that participated in certain job creation and training programs sponsored by qualified state governments (but did not retain any jobs through those programs) are exempt from filingForm 8853 if they have fewer than 100 full-time equivalent employees and did not earn more than $250,000 in wages during fiscal year 2013 ($300,000 if filing jointly). If your company qualifies for this exemption you do not need to file Form 8853even if you plan to claim the retention tax credit on your taxes.
To calculate whether an employer meets the requirement of retaining 50% of its full-time employees, it first calculates its total number of full-time employees (FTEs). Then it divides that number by 2 – the maximum number of FTEs that an employer can have without having any parttime employees – to get its number of “full time equivalents.” Next it determines what percentage each FTE represents of its total workforce: 25%, 30%, 35%, or 40%. Finally it looks at which group (“A,” “B,” or “C”) each FTE falls into based on those percentages: A means that all FTEs fall into this category; B means half fall into this category and half represent parttime workers; C means that only 1/4th of all FTEs fall into this category (25%) etc.). The company then counts up how many workers fell into Category A (all retained), Category B (1/2 retained), Category C (<1 retained), or no category at all (=100%). If the company retained 50% of its full-time employees, it would count as having retained at least 3 FTEs.
How to Calculate the Employee Retention Tax Credit
To qualify for the Employee Retention Tax Credit, you must:
- Be an employee of a U.S. company who was employed on or before December 31, 2017
- Have been with your company for at least 180 days in the previous year
- Earned income during the previous taxable year that exceeded $18,000 ($24,000 if married filing jointly)
Benefits of Applying for the Employee Retention Tax Credit
There are many benefits to applying for the Employee Retention Tax Credit. This tax credit can help you save money on your taxes and preserve the jobs of your employees. The following are some of the key benefits of applying for the Employee Retention Tax Credit:
- You can reduce your taxes by claiming this tax credit on your income taxes.
- The Employee Retention Tax Credit can help you retain talented employees by providing a financial incentive to keep them with your company.
- The Employee Retention Tax Credit can incentivize companies to continue expanding and investing in their businesses, which will in turn create more jobs for residents of your state or district.
- Claiming the Employee Retention Tax Credit is simple and straightforward, making it easy for you to get approved for this valuable tax break. There is no need to hire an accountant or lawyer to file for the credit – all you need is documentation from your company that proves how retaining qualified employees has benefitted it financially.
What Documentation is Needed to Apply for the Employee Retention Tax Credit?
To claim the Employee Retention Tax Credit on your taxes, you will need to provide documentation of your employee retention program. This could include:
- A completed Form 8845, which must be filed by the employer with their tax return; and
- Other supporting documents as required by the IRS.
How to Claim the Employee Retention Tax Credit on Your Taxes
If you are an employer and you are considering whether or not to retain your employees, the Employee Retention Tax Credit may be a valuable incentive for you. The credit is available to employers who retain at least 50% of their employees for the entire year. The credit is worth up to $2,000 per employee, which can be deducted from your taxes.
To qualify for the credit, you must meet certain requirements. First, you must have employed at least 50 employees during the tax year. Second, you must have paid at least $500 in wages to each of your employees during the tax year. Finally, you must have maintained your employment relationship with your employees throughout the year.
To calculate the credit, simply subtract $2,000 from the wages you paid to your employees during the tax year. If the result is less than $500, you can claim the full $2,000 credit. If the result is greater than $500 but less than $2,000, you can claim a portion of the credit based on how many employees you retained. For example, if you retained 30% of your employees, you can claim 30% of the $2,000 credit. If you retained all of your employees, you can claim the full $2,000 credit.
Common Mistakes to Avoid When Applying for the Employee Retention Tax Credit
Section 8 of this document provides Frequently Asked Questions (FAQs) about the Employee Retention Tax Credit. If you have any additional questions that are not covered in these FAQs, please contact the IRS at 1-800-829-3676.
The Employee Retention Tax Credit is a great way for businesses to offset costs that have been incurred due to the COVID-19 pandemic. Qualifying employers are able to receive valuable tax credits and deductions, which can be applied directly to their taxes. The process of applying for the credit requires careful consideration, as there are many factors involved in determining eligibility and calculating the amount of credit issued. By understanding the requirements and following all IRS guidance carefully, employers can benefit from this tax program and ensure they take full advantage of available benefits.
