Master the Employee Retention Tax Credit: A Comprehensive Guide on How to Claim Your Benefits

Understanding the Employee Retention Tax Credit (ERTC)

The Employee Retention Tax Credit is a valuable financial resource provided by the government to encourage businesses to retain their employees during challenging economic times. By offering a tax credit for keeping workers on payroll, businesses can reduce their overall tax liability and maintain workforce stability. In this comprehensive guide, we will discuss everything you need to know about claiming the ERTC to ensure you get the maximum benefit.

It's important to be aware of any potential changes or updates to the ERTC program, so be sure to consult a professional tax advisor for the most up-to-date information.

Eligibility Requirements for the Employee Retention Tax Credit

Before diving into the process of claiming the ERTC, it's essential to determine if your business is eligible for this incentive. The following are the key eligibility criteria:

Businesses affected by government-mandated shutdowns

Your business must have been forced to fully or partially suspend operations due to a governmental order related to COVID-19.

Significant decline in gross receipts

Your business must have experienced a severe decline in gross receipts compared to the same quarter in the previous year. This reduction should be more than 50% for the tax year 2020, and more than 20% for the tax year 2021.

Types of employers eligible for ERTC

Both private-sector employers and tax-exempt organizations can benefit from the Employee Retention Tax Credit. However, self-employed individuals, government entities, and businesses receiving Paycheck Protection Program (PPP) loans are not eligible for this credit.

Calculating the Employee Retention Tax Credit

Now that you've determined your eligibility, it's time to calculate the ERTC. The calculation varies depending on the tax year:

ERTC Calculation for 2020

• The maximum credit per employee is $5,000 for the entire year.
• You can claim a credit of 50% of qualified wages paid to an employee up to $10,000 in total annual wages.
• For businesses with more than 100 full-time employees, only wages paid to those not providing services due to COVID-19 related reasons are eligible for the credit.
• For businesses with 100 or fewer full-time employees, all wages paid during the eligible period qualify for the credit, regardless of whether the employee provided services or not.

ERTC Calculation for 2021

• The maximum credit per employee is $7,000 per quarter, totaling up to $28,000 for the entire year.
• You can claim a credit of 70% of qualified wages paid to an employee up to $10,000 in total quarterly wages.
• For businesses with more than 500 full-time employees, only wages paid to those not providing services due to COVID-19 related reasons are eligible for the credit.
• For businesses with 500 or fewer full-time employees, all wages paid during the eligible period qualify for the credit, regardless of whether the employee provided services or not.

Note that in both cases, healthcare costs provided by the employer can be included in qualified wage calculations.

How to Claim the Employee Retention Tax Credit

Once you have determined your eligibility and calculated the ERTC, it's time to claim the credit. Follow these steps to ensure a smooth process:

1. Adjust your payroll tax deposits

You can retain a portion of the federal employment taxes that you would otherwise deposit with the Internal Revenue Service (IRS) equal to the amount of your anticipated ERTC. This includes withheld federal income tax, Social Security, and Medicare taxes.

2. File Form 941, Employer’s Quarterly Federal Tax Return

To claim the Employee Retention Tax Credit, complete and submit IRS Form 941 for the corresponding quarter. On this form, you will provide information about your qualified wages, healthcare costs, and the total credit amount you are claiming. Be sure to fill out the appropriate lines and schedules related to the ERTC.

3. Request an advance payment if necessary

If your business needs immediate cash flow, you might consider requesting an advance payment of the ERTC by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. However, be cautious when using this option as any overpayment could result in penalties or interest.

Keep accurate records of all relevant documents and calculations so you can easily respond to any inquiries from the IRS regarding your claimed credits.

ERTC Considerations: Comparison Chart and Warning Notices

When planning for your Employee Retention Tax Credit application, keep the following considerations in mind:

Comparison Chart: ERTC vs. PPP Loans

While businesses cannot claim both the ERTC and PPP loans, it's important to evaluate which program best suits your specific situation. Weigh the benefits, cost, and availability of each program to make an informed decision:

• ERTC: Provides tax credits for eligible employers with no repayment required; available for businesses with affected operations or a significant decline in gross receipts.
• PPP Loans: Offers forgivable loans to cover payroll and other operating expenses; available for businesses with 500 or fewer employees experiencing financial hardship due to COVID-19.

Warning Notices: IRS Compliance and Audits

The IRS has implemented robust measures to ensure ERTC compliance, including audits of claimed credits. To avoid any issues, be vigilant about maintaining accurate records, providing complete and correct information on all necessary forms, and consulting with your tax advisor to ensure you are taking advantage of the credit correctly.

In conclusion, the Employee Retention Tax Credit is a valuable resource for businesses that have been impacted by COVID-19 related shutdowns or experienced a significant decline in gross receipts. By understanding the eligibility requirements, calculating the appropriate credit amount, and navigating the claiming process with care, your business can benefit from this much-needed financial relief.