Who Qualifies for the Employee Retention Tax Credit?

The Employee Retention Tax Credit (ERTC) is a refundable tax credit for eligible employers equal to 50% of qualified wages (including allocable qualified health plan expenses) that are paid to employees after March 12, 2020, and before January 1, 2021.

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Overview of the Employee Retention Tax Credit

The Employee Retention Tax Credit is a federal tax credit that is available to businesses that are affected by COVID-19. The credit is available for businesses that have experienced a decrease in gross receipts of at least 50% when compared to the same quarter in the prior year. The credit is also available for businesses that are shut down due to orders from a governmental authority.

What is the Employee Retention Tax Credit?

The Employee Retention Tax Credit (ERTC) is a refundable tax credit for eligible employers that retain their employees during the COVID-19 pandemic.

The credit is available to employers of any size that have experienced a full or partial shutdown due to COVID-19, or have experienced a significant decline in gross receipts.

Employers can claim the credit for each eligible employee that they retain, and the credit can be used to offset payroll taxes.

To be eligible for the ERTC, an employer must have:
– Experienced a full or partial shutdown due to COVID-19, or
– Experienced a significant decline in gross receipts (>50% when compared to the same quarter in 2019)

If you are an eligible employer, you can claim the credit for each eligible employee that you retain. An eligible employee is any full-time or part-time employee who was employed by you on March 12, 2020. The credit is equal to 50% of the qualified wages paid to each employee, up to $10,000 in wages per employee. This means that the maximum credit per employee is $5,000. Qualified wages include all forms of pay, including: salary, hourly pay, commissions, and other forms of compensation. Wages paid to employees who are not working (e.g., on paid leave) still qualify for the credit.

How much is the credit?

The credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.

For example, if an eligible employer pays $8,000 in qualified wages to an employee during the covered period, the employer may claim a credit of $4,000. If the employer pays $10,000 in qualified wages to an employee during the covered period, the employer may claim a credit of $5,000.

What are the eligibility requirements?

To be eligible, an employer must:

1. Have experienced either a full or partial shutdown due to COVID-19, OR have had a significant decline in gross receipts (defined as a 50% decrease when comparing Q1 2020 to Q1 2019, or a 20% decrease when comparing any quarter in 2020 to the same quarter in 2019).

2. Make an eligible payment to an employee after March 12, 2020 and before January 1, 2021.

Qualifying for the Employee Retention Tax Credit

The Employee Retention Tax Credit is a refundable tax credit for businesses that retain their employees and pay them salaries and wages during the COVID-19 pandemic. To be eligible, businesses must have been affected by the pandemic and must have experienced a significant decline in gross receipts. Businesses that qualify for the credit will receive a credit against their payroll taxes equal to 50% of the qualifying wages paid to their employees.

What are the eligibility requirements?

Employers are eligible for the employee retention credit if they paid qualifying wages to qualifying employees during any calendar quarter in 2020.

To be a qualifying employer, your business must have closed or partially suspended operations due to an order from an appropriate governmental authority related to COVID-19. For employers with operations that have not been fully suspended, the amount of the credit is based on the percentage of reduction in gross receipts. For certain startups, gross receipts include amounts taken into account in determining start-up expenses for which a deduction is allowable under Code Section 195. The employee retention credit is not allowed for PPP loan recipients who elect to exclude PPP loan forgiveness amounts from gross receipts.

Qualifying wages are those paid to an employee after March 12, 2020, and before January 1, 2021. Qualifying wages do not include amounts taken into account in determining any other credit under Code Section 3800. Wages eligible for the employee retention credit are those subject to Social Security taxes, including Medicare taxes (self-employment tax for sole proprietors), but do not include amounts that would have been allocable to sick pay or family leave if such amounts were not required to be paid pursuant to either the Families First Coronavirus Response Act or other mandatory sick pay laws.

Qualifying employees are those who were not provid

Are there any exceptions?

As with most tax law, there are a few key exceptions to keep in mind. First, if you’ve already laid off employees or cut their hours below the required levels, you won’t qualify for the credit. You also won’t qualify if your business is engaged in illegal activity, or if it’s a household employer.

How do I calculate the credit?

You calculate the employee retention credit by taking the eligible wages you paid to each employee during the quarter, up to $10,000 per employee for the entire year ($5,000 per employee for wages paid in a semi-weekly payroll period), and multiplying them by the applicable percentage.

The credit is 50% of eligible wages paid by an eligible employer
OR
70% of eligible wage if the employer pays health insurance premiums on behalf of its employees.

What are the record-keeping requirements?

To be eligible for the Employee Retention Credit, employers must maintain records documenting:
-Qualified wages paid to each employee
-The employer’s order from a federal, state or local government entity restricting operations due to COVID-19
-For a calendar quarter in which the employer’s operations are fully or partially suspended due to orders from a government entity, documentation linking the period of the suspension to the calendar quarter

If an employer does not have written records documenting qualified wages paid or the applicable government order, the IRS may require the employer to provide other evidence to support its claim for the credit.

Applying for the Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) is a refundable tax credit for employers that are experiencing financial hardship due to the COVID-19 pandemic. The credit is equal to 50% of qualifying wages paid by the employer to employees after March 12, 2020, and before January 1, 2021. To be eligible for the credit, employers must have experienced a decrease in gross receipts of at least 50% when compared to the same quarter in the prior year.

How do I apply for the credit?

You may be able to claim the credit by completing and filing Form 5884 with your employer’s annual income tax return. You don’t have to reduce your general business credit by the amount of the credit.

If you’re claiming the credit for wages paid in 2020 and you haven’t filed your income tax return yet, you may be able to file an amended return for 2019 to claim the credit. You would file Form 5884 with Form 1040-X, Amended U.S. Individual Income Tax Return.

If you’re a partnerships, S corporations, or other pass-through entities, each partner or shareholder may be eligible to claim their share of the credit on their individual income tax return.

When can I expect to receive the credit?

You can expect to receive the credit when you file your business’ employment tax return or quarterly employment tax return. The credit will reduce your employment tax liability on a dollar-for-dollar basis.

Conclusion

The answer to this question is unfortunately, not very straightforward. The Employee Retention Tax Credit is a government incentive to retain employees, and it is available to businesses of all sizes. However, there are a few eligibility requirements that businesses must meet in order to qualify for the credit.

What are the benefits of the Employee Retention Tax Credit?

The Employee Retention Tax Credit (ERTC) is a refundable tax credit for eligible employers equal to 50% of qualifying wages paid to employees after March 12, 2020, and before January 1, 2021. The maximum credit is $5,000 per employee. The credit is available to eligible employers who retain their employees and pay qualifying wages even if the employer’s business is closed or operating at a reduced level due to the COVID-19 pandemic.

To be eligible for the credit, an employer must have experienced a full or partial shutdown of operations due to a COVID-19 quarantine order issued by any government entity OR have experienced a significant decline in gross receipts (defined as a decrease of more than 50% when compared to the same quarter in the prior year).

Qualifying wages are generally defined as those wages that would be subject to the payroll taxes imposed under the Federal Insurance Contributions Act (FICA), including Medicare tax. However, for employers who are members of an federal TaX-Exempt Organization they may instead elect to include qualified sick leave and expanded family and medical leave wages when determining their credit amount. Government entities and small businesses who receive Payroll Protection Program (PPP) loans are not eligible for the Employee Retention Credit.