Understanding Employee Retention Tax Credit Eligibility
In light of the COVID-19 pandemic, many businesses have faced unprecedented challenges. To support these businesses and help them retain employees, the government has introduced the Employee Retention Tax Credit (ERTC). This federal tax incentive provides financial relief to qualifying employers who keep their staff on payroll during these difficult times.
What is the Employee Retention Tax Credit?
The ERTC is a refundable tax credit designed for businesses affected by the COVID-19 crisis. It allows eligible employers to claim a percentage of wages paid to their employees as a tax credit. The goal of the program is to encourage companies to maintain their workforce and avoid layoffs or furloughs.
ERTC Overview:
- A refundable tax credit against certain employment taxes
- Available for wages paid after March 12, 2020, and before January 1, 2022
- Credit amount: Up to 70 percent of qualified wages for each employee
- Maximum credit per employee: $7,000 per quarter
Determining Your Business's Eligibility for ERTC
To qualify for the Employee Retention Tax Credit, your business must meet specific eligibility criteria related to the impact of the COVID-19 pandemic on its operations. These requirements vary depending on the relevant time period.
Eligibility criteria for wages paid between March 13, 2020, and December 31, 2020:
- Your business must have been fully or partially suspended due to government orders related to COVID-19
- OR your business must have experienced a significant decline in gross receipts (a 50 percent or more drop compared to the same quarter in 2019)
Eligibility criteria for wages paid between January 1, 2021, and December 31, 2021:
- Your business must have been fully or partially suspended due to government orders related to COVID-19
- OR your business must have experienced a significant decline in gross receipts (a 20 percent or more drop compared to the same quarter in 2019)
Please note that employers who received Paycheck Protection Program (PPP) loans may be eligible for ERTC as well, but they cannot claim the credit on wages covered by the forgiven portion of their PPP loan.
Calculating Qualified Wages for Employee Retention Tax Credit
The term “qualified wages” refers to the compensation you pay to your employees that is eligible for the tax credit. The calculation of qualified wages depends on the size of your business and the period during which the wages were paid.
For businesses with 100 or fewer full-time employees in 2019:
All employee wages are considered qualified wages, regardless of whether the employee was working or not, as long as the employer meets the eligibility criteria detailed above.
For businesses with more than 100 full-time employees in 2019:
Qualified wages include only the compensation paid to employees who were not providing services due to the suspension of operations or the decline in gross receipts.
How to calculate the maximum credit amount:
To determine the maximum ERTC amount, multiply the qualified wages by the applicable percentage (50 percent for 2020 and 70 percent for 2021). The maximum credit per employee is $5,000 for 2020 and $7,000 per quarter for 2021.
Claiming the Employee Retention Tax Credit
To claim the ERTC, employers must report their total qualified wages and related health insurance costs on their quarterly employment tax return (Form 941). In addition, they can reduce their federal employment tax deposits by the anticipated amount of the credit.
If your business requires an advance payment of the tax credit, you can submit Form 7200, Advance Payment of Employer Credits Due to COVID-19. This form allows eligible employers to request a refund of any excess credit that exceeds their payroll tax liability.
Important Considerations for ERTC Eligibility
Before claiming the Employee Retention Tax Credit, it's crucial to ensure that your business meets all eligibility requirements. Keep in mind that the rules surrounding ERTC have evolved since its inception in March 2020, so it's essential to stay up-to-date with the latest guidance from the IRS.
In conclusion, the Employee Retention Tax Credit offers significant financial relief to businesses affected by the COVID-19 pandemic. By understanding the eligibility requirements and how to calculate and claim the credit, you can take full advantage of this valuable incentive and support your employees during these challenging times.