Qualifications for Employee Retention Credits
“Employee Retention Tax Credit (ERTC) | Definition & Eligibility” from financestrategists.com and used with no modifications.
The Employee Retention Credit (ERC) is a federal initiative designed to help businesses retain employees during the challenging economic conditions caused by the COVID-19 pandemic. But, not every employer automatically qualifies for this relief. Understanding the defining criteria can help you make strategic decisions for your business.
The CARES Act and ERC Guidelines
The Coronavirus Aid, Relief, and Economic Security (CARES Act) laid the groundwork for the ERC. It allowed qualifying employers to claim a tax credit of 50% on certain wages up to $10,000 per employee. This provision applied to wages paid during calendar year 2020.
This was later expanded under the Consolidated Appropriations Act, which bumped the credit percentage up to 70% for 2021. The American Rescue Plan Act extended the increased credit for the entire 2021 calendar year, lifting the annual cap to $28,000 per employee.
The Employee Retention Credit Criteria
There are two main criteria to qualify for the ERC. Firstly, the employer must have seen a decline in gross receipts of more than 20% compared to the same quarter in 2019. Secondly, the business must have been forced to partially or fully suspend operations due to a government order related to COVID-19.
Note that eligibility is determined on a quarter-by-quarter basis. This means that a business may qualify for one quarter but not for another, depending on fluctuations in gross receipts and the impact of government restrictions.
For the employee count, if a business had more than 100 employees in 2019, only the wages paid to non-working employees due to shutdowns or revenue reduction can be claimed for 2020. However, for 2021, the threshold increased to 500 employees.
Delving into Eligibility of Employers for ERTC
“American Rescue Plan Act: Business Tax Impacts — Delta Wealth Advisors” from deltawealthadvisors.com and used with no modifications.
ERC has been a lifeline for many businesses, particularly those in industries extremely hard-hit by the pandemic. It’s vital to dive deeper into eligibility criteria and conditions to ensure your business maximizes potential benefits.
Impact of the Coronavirus on Businesses and Employees
The impact of the coronavirus pandemic has been profound and far-reaching, with many businesses faced with financial hardships and a bleak outlook. Since many employers had to reduce their workforces or, in some cases, close completely, the ERC has been instrumental in providing needed relief.
The credit was designed with American workers in mind, aiming to provide a financial buffer for businesses grappling to make payroll. Essentially, it helps businesses retain employees, even when they might not be able to meet payroll costs because of reduced operations or closures due to government mandates.
ERC’s Influence on the Economy
The overall influence of the ERC on the economy has been significant. It has provided businesses with much-needed funds enabling them to keep employees on board, reducing job losses and thus, the unemployment rate.
Exploring Qualified Wages for ERC
The concept of “qualified wages” is central to the ERC, as these wages form the basis for calculating the credit. Included in this category are both wages and certain health plan expenses paid by the employer.
Understanding Full-Time Employee Definition
To fully grasp the ERC criteria, understanding how the IRS defines a full-time employee is crucial. For the sake of the ERC, a full-time employee is defined as someone who worked at least 30 hours per week, or 130 hours in a month. This does not include full-time equivalent employees, which is a different criteria used for other tax provisions.
If an employer had more than 100 full-time employees in 2019, only the wages paid to employees not working due to a closure or a significant reduction in business can be counted as qualified wages in 2020. On the other hand, for 2021, this employee threshold was raised to 500 employees.
Accounting for Health Insurance Costs in Qualifying Wages
Apart from regular wages, the costs of providing health benefits to employees also form a part of qualified wages, provided the employer pays them. However, if the employer and the employee share the cost, only the employer’s portion is counted. This is another incentive for businesses to continue providing health insurance to their employees during the pandemic.
Understanding the ERTC Claim Procedure
To claim the ERC, businesses must follow a certain procedure, including understanding the appropriate forms to use and the deadlines to adhere to.
Using IRS Form 7200 for Advanced Payment
Form 7200, Advance Payment of Employer Credits Due to COVID-19, allows eligible employers to request an advance payment of the credit. However, starting from 2021, this form is limited to small employers only, i.e., employers who averaged 500 or fewer full-time employees in 2019. Employers exceeding this limit cannot claim advance credits and can only claim the ERC on their Form 941 or other applicable employment tax return.
Retroactive Claiming with Form 941-X
Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, is what employers need to use if they are making a retroactive claim for the ERC. This could be the case if they initially missed claiming the credit for a certain quarter, but now want to claim it. This form allows employers to correct errors on a previously filed Form 941 and take into account the ERC that was originally overlooked.
Effect of PPP Loan on ERTC
The ERC isn’t the only form of assistance available to employers during the COVID-19 pandemic. The Paycheck Protection Program (PPP) loans also offer significant aid. However, it’s essential to know that taking a PPP loan could affect an employer’s ability to claim the ERC, and it’s important to be aware of these links.
Interplay of PPP Loans and the Employee Retention Credit
Initially, the CARES Act stipulated that employers could opt for either PPP loans or the ERC, but not both. However, the Consolidated Appropriations Act, 2021, changed this. It made it possible for businesses to use both programs, although with certain controls. If a business receives a PPP loan, it can’t use the same wages for ERC calculation that are used to seek forgiveness for the PPP loan.
Navigating Through PPP Loan Forgiveness and ERTC
Finding the optimal balance between PPP loans and the ERC can be tricky. It requires careful planning and handling of finances. Having a clear understanding of the qualifying expenses for both programs can help the employer maximize benefits from both. Consulting a tax professional or an accountant can provide the needed guidance.
Final Thoughts on ERC Optimization Strategies
The Employee Retention Credit program is undoubtedly an invaluable resource for businesses grappling with the economic fallout of the COVID-19 pandemic. A strategic approach can help them maximize the benefits, thereby playing a crucial role in their survival and recovery.
Benefits of Consulting with a Tax Attorney
A tax attorney or a certified public accountant can provide invaluable advice when claiming the ERC. They would be well-versed in the eligibility criteria, and can help ensure that all relevant costs are being included while calculating the credit. Thereby, employer’s can maximize their credit payout and stay in compliance with tax regulations.
Important Deadlines for Claiming the ERC
Employers should be aware of deadlines for claim submission. The statute of limitations to claim ERC is generally three years from the time the original Form 941 was filed, or two years from the time the tax paid was reported, whichever is later.
Frequently Asked Questions
Is ERTC available for employers with less than 500 employees in 2021?
Yes, the Employee Retention Credit is available for all employers, regardless of their size, provided they meet the eligibility criteria. However, the rules for counting wages as ‘qualified wages’ differ based on the employer size.
How does the calculation for ERTC vary between 2020 and 2021?
In 2020, the credit rate was 50% of qualified wages, capped at $10,000 per employee for the year. For 2021, the rate was increased to 70% of qualified wages, with the cap increased to $10,000 per employee per quarter.
Can employers claim ERTC, if they have received PPP funds?
Yes, employers can claim the ERC even if they have received PPP loans, as long as they don’t claim the ERC for wages used towards PPP loan forgiveness.
What type of wages qualify for the ERTC?
Qualified wages include both wages paid to employees and certain health plan expenses paid by the employer. For larger employers with more than 100 employees in 2020 or more than 500 employees in 2021, only wages paid to employees who did not provide services are considered qualified.
What are the specific deadlines for claiming the ERC?
The ERC must be claimed within three years from the time the original Form 941 was filed, or two years from the time the tax paid was reported, whichever is later.