Employee Retention Credit FAQ: Here Are Popular Questions About The Tax Refund Credit

Unlock the mysteries of the ERC with our comprehensive Employee Retention Credit FAQ, designed to guide you effortlessly through the maze of regulations.

Employee Retention Credit FAQ: Here Are Popular Questions About The Tax Refund Credit

The Employee Retention Credit, a business lifeline during challenging economic times, can often be daunting. This article aims to simplify its complexities, offering clear, concise answers to common queries. As we delve into eligibility requirements, calculation methods, and claim procedures, we aim to make the Employee Retention Credit less of an enigma and more of a practical tool for your business's financial strategy.

General Overview Questions

What Is Employee Retention Credit?

The Employee Retention Credit is a provision of the U.S. government's Coronavirus Aid, Relief, and Economic Security (CARES) Act. Instituted in March 2020, it was designed to aid eligible employers who kept their employees on the payroll during the economic upheaval caused by the COVID-19 pandemic. The Employee Retention Credit is a refundable tax credit to counter certain employment taxes, providing relief to eligible businesses, tax-exempt organizations, and even certain governmental entities.

The credit applies to qualified wages and health plan expenses paid to employees during business suspension or significant decline in gross receipts. It was initially available for wages paid during 2020, but subsequent legislation extended its benefits through 2021. With the ERC in their arsenal, eligible employers have a valuable tool to maintain their workforce, stabilize operations, and navigate the financial uncertainties of the pandemic era.

Am I Eligible For The ERC?

To be eligible for the ERC, you must meet specific criteria set by the IRS. The eligibility requirements differ between 2020 and 2021.

In 2020, eligible employers can qualify if a COVID-19-related shutdown order either totally or partially suspends their operations. Alternatively, they may be eligible if they experienced a significant decline in gross receipts: a drop to less than 50% of their comparable quarter in 2019.

However, in 2021, eligibility was expanded. Now, employers are eligible if they can demonstrate that their gross receipts for a quarter are lower than 80% of the gross receipts for the same quarter in 2019. Employers not in existence in 2019 can compare 2021 quarter gross receipts to the same quarter in 2020.

It's essential to remember that employers who received a Paycheck Protection Program (PPP) loan can still qualify for the ERC. However, they cannot claim the credit for wages paid with the Paycheck Protection Program (PPP) loan proceeds that have been forgiven.

It's also worth remembering that eligible employers can get the credit immediately by reducing their employment tax payments. In addition, if the employer's employment tax deposits need to be revised to meet the credit, the Internal Revenue Service (IRS) may make an advance payment to the eligible employer.

Remember that the Employee Retention Tax Credit rules can be complicated. To grasp the complexities of the ERC and how it applies to your case, it's always a good idea to consult with a tax specialist.

What Are The Restrictions In Employee Retention Credit?

While the Employee Retention Credit offers an invaluable financial boost for many businesses, certain restrictions apply. Notably, the credit only applies to some wages the eligible employer pays. It is particularly relevant for wages paid to employees not working due to the business suspension or the drop in gross receipts, referred to as Qualified Wages.

The determination of Qualified Wages depends on the employer's average number of employees in 2019. For companies with over 100 employees, only wages paid to employees not providing services due to the business suspension or the drop in gross receipts can be claimed. Consequently, wages paid to employees who are working (remote or otherwise) during these periods do not qualify for the credit.

In the case of companies with 100 or fewer employees, all wages paid during business suspension or a notable decline in gross receipts qualify for the credit, regardless of whether the employees worked or not. However, the salaries that can be claimed are capped at $10,000 per employee for each year.

Moreover, the credit is subject to a maximum of 70% of Qualified Wages. This means an eligible employer can claim the highest credit of $7,000 per employee per quarter in 2021. Additionally, for employers using third-party payers, the responsibility to correctly calculate and claim the credit lies with the common-law employer, not the third-party payer.

How Is The Employee Retention Credit Determined?

The Employee Retention Credit amount is determined based on the calendar quarter and the percentage of qualified wages and health plan expenses.

For 2020, the credit equals 50% of the qualified wages and health plan expenses paid by the proprietor, up to $10,000 per employee for the whole year. This means an eligible employer can claim a maximum of $5,000 per employee as a credit for 2020.

In 2021, the calculation changes. The credit equals 70% of the qualified wages and health plan expenses the employer pays, with the limit now at $10,000 per employee per quarter. As a result, the maximum credit an employer could claim per employee in 2021 has significantly increased, reaching as high as $28,000 ($7,000 per quarter x 4).

Qualified wages include not only salaries and hourly wages but also particular healthcare costs the employer pays on behalf of its employees, such as health insurance premiums. However, an employer's contribution to Health Savings Accounts (HSAs) or Archer MSAs is not eligible for the credit.

It's also important to note that the credit is refundable. If the credit exceeds the employer portion of the social security tax due, the excess is refunded to the employer. If the employer's social security tax does not cover the whole credit, they may receive the amount as an advance payment from the IRS by submitting the appropriate form.

Determining the exact amount of the Employee Retention Credit can be complex due to these variables and the specific situations of individual businesses. Therefore, eligible employers are encouraged to work with a tax professional or utilize the IRS's step-by-step instructions and worksheet found in the instructions for Form 941, Employer's Quarterly Federal Tax Return.

How Do I Apply For The ERC?

  1. Determine Eligibility: Before you begin the ERC application process, make sure you meet the qualifying criteria for the year you are applying for. The specifics of eligibility are described in the section above.
  2. Calculate Qualified Wages: Add all the qualified wages paid to your employees during eligible quarters. This calculation varies depending on the number of employees you had in 2019 and whether you experienced a total or partial suspension of operations or a significant decline in gross receipts.
  3. Gather Necessary Documents: You'll need to gather important documents, such as all your payroll records for the period you're claiming the credit. This includes Form W-3, Form 941, Form 7200, and related tax records.
  4. Claim the Credit on Form 941: To claim your credit, you must fill out Form 941, Employer's Quarterly Federal Tax Return. Remember to include the calculated Employee Retention Tax Credits on line 11c and complete Schedule B. You can also submit Form 7200, Advance Payment of Employer Credits Due to COVID-19, if you need more than your employment tax deposits to cover the credit.
  5. Submit Your Form: Finally, submit Form 941 to the IRS. The form's due date is the last day of the month following the quarter's end. For example, the due date for the first quarter (January to March) would be April 30.
  6. Wait for Processing: The IRS will process your claim and notify you once it's complete. The credit will be applied to offset your employment tax deposits if approved. If the credit exceeds your deposits, the IRS will issue a refund.
  7. Keep All Records: Make sure to keep all related records in case of a future audit by the IRS. This includes all wage and payroll information and documentation demonstrating how COVID-19 impacted your business.

Qualification Questions

What Is A Recovery Startup Business?

A Recovery Startup Business is a term introduced in the American Rescue Plan Act of 2021, which refers to a company that started its operations after February 15, 2020. The business must also fall within a specified gross receipts threshold. Although these companies may not meet the traditional Employee Retention Credit criteria, they can claim the refundable payroll tax credit up to a certain maximum for the third and fourth quarters of 2021. The aim is to support new businesses impacted by the pandemic but has yet to benefit from the earlier stipulations of the ERC.

What Are Qualified Wages For The ERC?

Qualified wages under Employee Retention Credit encompass an employer's compensation within the stipulated eligibility time frame. These wages include an employee's regular income and cover certain employer-paid health plan expenses. Specifically, the employer's portion of the costs for providing health benefits to employees, such as insurance premiums, can be considered as part of the qualified wages. Nevertheless, contributions made by the employer towards Health Savings Accounts (HSAs) or Archer Medical Savings Accounts do not qualify.

Can I Still Qualify For the ERC If My Business Was Profitable?

Indeed, a business generating profits may still be eligible for the Employee Retention Credit. The eligibility for the ERC is not directly tied to profitability but to the specific impacts of COVID-19 on business operations. A company can show a significant decline in gross receipts or a full or partial cessation of operations due to a COVID-related governmental order. In that case, it may qualify for the ERC, regardless of whether they were profitable during this period. However, it's crucial to understand that specific requirements and thresholds apply, so it's advisable to consult with a tax professional to ascertain eligibility.

Can I Still Qualify For The ERC If I Don't Pay Income Taxes?

Contrary to some misconceptions, a lack of income tax liability does not automatically disqualify a business from the Employee Retention Credit (ERC). The ERC is a refundable credit against certain federal employment taxes, and its eligibility criteria focus on the impact of COVID-19 on the business, not on the business's income tax situation. Companies that didn't owe income tax can claim the ERC if they meet other qualifying conditions like experiencing a drop in gross receipts or a suspension in operations due to governmental orders related to COVID-19.

Do Nonprofits Qualify For The ERC?

Nonprofit organizations are indeed eligible for the Employee Retention Credit (ERC). The ERC program is available to tax-exempt organizations under Internal Revenue Code Section 501(c), provided they meet the eligibility criteria for COVID-19 impacts on their operations. This means nonprofits who can prove operational disruptions or significant reductions in gross receipts due to the pandemic can apply for the ERC. The ERC is a valuable financial resource for nonprofits striving to retain their employees during challenging times.

Tax And Logistics Questions

Is The Employee Retention Credit A Taxable Income?

The Employee Retention Credit (ERC) is not taxable income for your business. This credit is applied directly to offset your employment tax liabilities, and any excess is received as a refund. However, it's important to note that the amount of the credit may reduce the amount of your deduction for employment taxes, which could indirectly affect your taxable income. Always consult with a tax professional to understand the full implications of your specific circumstances.

What Is The Deadline For ERC Application?

The Employee Retention Credit (ERC) operates quarterly, intertwined with filing your quarterly federal tax returns. Consequently, the application deadline for the ERC typically aligns with these quarterly tax filing deadlines.

However, the three-year statute of limitations applies if you're seeking to claim the ERC retroactively for previously filed quarters. This means you can amend past tax returns to claim the credit as long as those returns were filed within the last three years.

As with any tax-related matters, deadlines can sometimes vary based on specific circumstances, so it's always advisable to consult with a tax professional for guidance tailored to your situation.

  • Deadline for 2020 tax year (Q2-Q4)- April 15, 2024
  • Deadline for 2021 tax year (Q1-Q4) - April 15, 2025

Is ERTC Different From ERC?

While ERTC (Employee Retention Tax Credit) and ERC (Employee Retention Credit) are often used interchangeably, they essentially refer to the same program established by the U.S. government as a part of the CARES Act in retort to the COVID-19 pandemic. This program incentivizes businesses to keep employees on their payroll during this challenging period.

However, the difference lies in the specific terms used: ERTC explicitly mentions "tax" in its acronym, emphasizing the tax credit part of this federal assistance. ERC is a more general term referring to the overall program. Despite the slight difference in terminology, ERTC and ERC refer to the exact financial relief mechanism for businesses.

How Will I Receive My Employee Retention Credit?

Once your Employee Retention Credit (ERC) claim is approved, the IRS will apply the credit to any outstanding employment tax liabilities first. If the credit exceeds these liabilities, the IRS will refund the remaining amount to your business. This refund will usually be delivered via bank account direct deposit or a check in the mail, depending on the information provided during the application process.

Does The ERC Have To Be Paid Back?

The Employee Retention Credit (ERC) is a form of relief designed to assist businesses during the COVID-19 pandemic, and it doesn't need to be repaid. Think of it as a helping hand from the government, not a loan.

It's an entirely refundable tax credit, which means that if the credit amount exceeds the total amount owing in employment taxes, the difference is reimbursed to the employer. Businesses can utilize these funds to mitigate operational costs and retain staff without worrying about future repayment obligations. Please consult with a tax advisor for personalized guidance.

Does The IRS Audit The ERC

While the IRS has not detailed a specific audit plan for the Employee Retention Credit (ERC), it's essential to know that all tax credits and deductions are subject to potential audit. Therefore, businesses should maintain comprehensive compliance records with the ERC's eligibility requirements.

Such documentation could include:

  • Evidence of significant revenue decline.
  • Proof of full or partial suspension due to COVID-19-related governmental orders.
  • Records of qualified wages paid.

This careful record-keeping can help businesses effectively respond to any potential inquiries or audits from the IRS related to the ERC.

How Do I Avoid Employee Retention Credit Fraud And Scams?

Beware of Phishing Attempts

Always be wary of phishing scams that masquerade as IRS emails or messages. The IRS will never contact taxpayers via email regarding a tax bill, refund, or Economic Impact Payments. Do not click on links that pretend to be from the IRS, and be aware of websites and emails that attempt to imitate the IRS's site or messages.

Verify Credentials of Tax Advisors

Verify their credentials before engaging with any tax advisor or consultant claiming to specialize in the Employee Retention Tax Credit. A legitimate professional should have a Preparer Tax Identification Number (PTIN) for filing returns. The IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications can be used to confirm their legitimacy.

Report Suspicious Activity

If you suspect fraudulent ERC claims, report them to the IRS. This can include misinformation provided by employers, tax preparers, or any other entities. The IRS encourages reporting suspected tax evasion and fraud.

Maintain Secure Systems

Ensure your computer systems and sensitive financial data are secure. Scammers may try to steal this information to make fraudulent ERC claims. Regularly update your security software, use secure WiFi networks, and restrict access to financial information to prevent unauthorized access.

Learn more about the ERTC program by heading to the ERTC Express website!