Employee Retention Tax Credit Application: How To Apply ERTC (CARES Act)
The pandemic marked a horrendous period for small businesses around the globe. With the world seemingly halting and people locked away in their homes, several companies are backed into a corner and forced to lay off some of their employees. A lot didn’t survive, while some were forced to temporarily or partially suspend all business operations.
In those dark times, Congress acted to save the economy. In March 2020, they established the Employee Retention Tax Credit to give businesses some financial relief during the global pandemic.
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Though expired, people can still take advantage of the Employee Retention Tax Credit to improve their company retention rate. To help, this article will delve deep into the ins and outs of ERTC, as well as precious metal companies that eligible employers and their employees can consider to help with their retirement savings.
What is the Employee Retention Credit?
The Coronavirus Aid, Relief, and Economic Security, or the CARES Act, made and established the Employee Retention Tax Credit (ERTC). It is a refundable tax credit that businesses are allowed to claim on qualified wages, including specific health insurance costs, paid to retained employees from March 13, 2020, up until December 31, 2020.
The original ERC has been modified several times to expand its reach and accommodate more businesses in the country. Ultimately, Congress halted it as of September 30, 2021 — except for startup recovery businesses defined by the Infrastructure Investment and Jobs Act.
While the CARES Act became law in early 2020, the availability and effectiveness of the ERC Credit were limited for a few valid reasons. Most notably, the Act prevented employers from utilizing their Employee Retention Tax Credit if they had already taken a Paycheck Protection Program or PPP loan. As many employers eligible for the PPP loan took it as a more favorable option, the utilization of the ERTC credit was, therefore, limited.
Since the passing of the Consolidated Appropriations Act in late 2020, this mutually exclusive provision has been removed and eliminated — making the Employee Retention Credit retroactively available to eligible employers who received a PPP loan. Additionally, the CAA, along with the help of the American Rescue Plan Act (signed into law in March 2021), significantly extended and expanded the eligibility of the ERC Credit.
How Do the Credits Work?
The Employee Retention Credit is considered a refundable credit for qualified employee wages. This tax credit is based on payroll taxes rather than income taxes. That means eligible employers can still claim the Employee Retention Credit even if they paid no income taxes in 2020 or 2021.
The American Rescue Plan Act specified that the non-refundable pieces of the Employee Retention Credit would be claimed against the Medicare Taxes instead of against the Social Security taxes, as they did in 2020. However, note that this change only applies to wages paid after June 30, 2020, and will not change the total credit amount.
If the credit exceeds or exceeds the employer’s total liability of the portion of Medicare Taxes or Social Security taxes, depending on whether before June 30, 2020 or after any calendar quarter, the excess amount is then refunded to the eligible employer.
What Employers Qualify for the Employee Retention Tax Credit?
ERC is available to any business with employees. The company only needs to meet one of these two eligibility requirements to qualify for the credit:
- Experience a vast and significant decline in gross receipts during the calendar quarter.
- Due to governmental orders, the business had a full or temporary suspension of operations during any calendar quarter in 2020.
While businesses of all types and sizes can benefit from the Employee Retention Credit, the program favors small businesses over larger eligible employers.
For 2020, a small business is defined as an organization that averaged 100 or fewer full-time employees in 2019. For 2021, the definition is expanded to include businesses that averaged 500 or fewer full-time employees in 2019.
A more significant eligible employer can claim the Employee Retention Credit but only for wages paid to eligible employees not to work or for some qualified health care expenses. Small businesses can claim the ERC for all employees, whether they worked or not.
For recovery startup businesses, the ERC was amended in 2021 to let them gain access. A so-called recovery startup business can apply for credit for 2021’s third and fourth quarters. A recovery startup business is defined as one that was opened after February 15, 2020, with annual gross receipts under $1 million.
What wages are eligible when calculating the retention credit?
For businesses that had any shutdown due to the pandemic or experienced a significant decline in gross receipts, all wages paid to their employees are considered qualified wages. The ERTC is a retrievable tax credit that takes the form of a grant that can return several thousand dollars to the employee.
Generally, wages are subject to FICA taxes, and qualified health care expenses are needed when calculating for the ERTC.
When determining the qualified health expenses, the Internal Revenue Service has various ways to calculate it depending on circumstances. They generally include the eligible employer and employee pre tax portion, not the after-tax amounts.
As for determining the qualified wages that they can include, a business owner must first identify the number of their workforce, specifically their full-time employees.
Are Tipped Wages Included in Qualified Wages?
The IRS Notice 2021-49 indicated that tips included in qualified wages were subject to FICA. Generally, if the tips are over $20 in a calendar month for an employee, then all the tips would be included in qualified wages for the retention credit.
Things to Know Before Filing The Employee Retention Credit in 2023
Here are a few essential things to know before a business can file for its ERC:
How to claim Employee Retention Credit
There are three ways to claim Employee Retention Credit:
- File A Form 941: To claim the credit for the past quarter (s), the employers must file Form 941-X for the applicable quarters in which the qualified wages were paid.
- Reduce Payroll Tax Deposits: Employers can minimize or reduce the amount of federal employment tax deposits by the credit amount determined based on qualified wages.
- Request Advance Payment: If the business qualifies for a credit that exceeds the necessary deposits, it can gain the refundable portion before filing the payroll tax return using Form 7200.
How to calculate Employee Retention Credit
To figure out the Employee Retention Tax Credit ERTC calculations, determine the number of eligible employees first and calculate the total amount of qualifying wages paid to those said employees during each relevant quarter.
How much is the Employee Retention Credit
Eligible businesses can claim the credit against what they often pay in Social Security Tax on up to almost 70% of the qualified wages paid to their employees. The qualified wages are limited to $10,000 per employee per calendar quarter in 2021.
How to file for employee retention credit
To file for the Employee Retention Tax Credit ERTC, the employers must complete Form 941. Using this form, a business can adjust employment taxes within three years of the original return or two years after the eligible employer has paid the tax.
Essential Questions To Learn More About The Employee Retention Tax Credit
Is the employee retention credit taxable income?
Employee Retention Credit is not taxable income. Instead, it is a tax credit that can become a refund. It is not a federal government loan nor a source of business income. It is free money off their tax bill.
Can I claim the employee retention credit and PPP?
Thanks to the changes made to ERC, a business that received a PPP loan may now apply for the ERC. The caveat is that they can’t use the wages that qualified them for the PPP loan forgiveness to determine their ERC amount.
What can I use the employee retention credit on?
Employers should use ERC to cover the losses caused by the impact of the pandemic. It means employers can use it to make up for shortfalls.
Do I have to pay back for the employee retention credit?
Employers do not need to pay back the ERC. Rather than being a loan, the ERC is a repayment by the federal government for the losses.
How much is the ERC in 2023?
The largest amount an eligible employer can gain is $10,000 per employee per quarter. They may qualify for health expenses through the CAA, as well. That is the maximum credit they will receive. The amount will depend on the number of employees they have and the wages paid.
How long does it need to get a refund for the employee retention credit?
A business can expect to wait 6 — 10 months after filing to receive its tax credits. It will likely depend on various factors, such as the number of claims and complexity.
Final Thought – Employee Retention Tax Credit
The ERTC is a refundable tax credit for qualifying wages. It provides aid to businesses that experienced a full or partial suspension in business operations or a substantial decline in gross receipts. While the ERTC officially stopped, there is still time to revisit eligibility and file a claim to assess whether they qualify for the credit.
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