Check your qualifications and eligibility
Are you a business owner looking for ways to help your employees during the COVID-19 pandemic? The Employee Retention Tax Credit (ERTC) may be just what you need!
This refundable tax credit from the IRS rewards businesses that have kept their employees, up to $26,000 per employee.
In this article, we’ll discuss the eligibility requirements, how to calculate the credit amount and filing a claim.
Read on to learn more about how the ERTC works and how it can benefit you and your employees.
Overview of the ERTC Program
The ERTC program offers businesses a refundable business tax credit to reward their loyalty and dedication to their employees during the COVID-19 pandemic, up to $26,000 per employee.
Private businesses or tax-exempt organizations that conduct a trade or business may be eligible if they closed or limited operations during the pandemic.
Businesses must have 100 or fewer full-time employees in 2020 and 500 full-time employees in 2021 to qualify for this credit.
Qualified wages include all forms of wages that are subject to FICA taxes, including tips that are Medicare wages.
To calculate the credit amount for 2020, businesses should multiply qualified wages up to an annual cap of $10,000 per employee by 50%.
In 2021, each quarter has its own cap of $10,000 per employee and businesses should multiply qualified wages up to the quarterly cap by 70% when calculating their credits for each quarter.
Businesses cannot double benefit from using the same wages for claiming other tax credits or pandemic relief along with ERTCs.
It is important to note that there are scammers out there trying to take advantage of businesses and individuals looking into claiming an ERTC so it’s essential that you consult with your certified public accountant (CPA) or attorney before making any decisions about applying for this credit.
Furthermore, you can reference archived Health Orders and Directives from the San Francisco Department of Public Health as well as IRS Notice N2021-20 which provides significant detail on what constitutes a full or partial suspension of operations in order to make an informed determination about eligibility requirements.
There is no limit on how many employees may be included when determining eligibility; however, it is easier for small businesses due to fewer staff members needing coverage under the ERTC program.
If you kept your employees employed throughout the pandemic, then you may be eligible for this refundable business tax credit so it’s worth exploring further!
Eligibility Requirements
You may be eligible for the ERTC if you’re a private business or tax-exempt organization conducting a trade or business, and your government body ordered you to either cease operations or continue with some limitations.
Additionally, if your business lost money compared to before the pandemic, then you may qualify as well.
The eligibility rules for 2020 and 2021 are different; businesses with 100 or fewer full-time employees may include qualified wages for all employees when calculating the credit in 2020, whereas this threshold is raised to 500 or more full-time employees in 2021.
Qualified wages include all forms of wages that are subject to FICA taxes and tips may also be considered qualified wages as long as they are Medicare wages.
It is important to note that businesses cannot double benefit by utilizing the same wages for claiming the ERTC and other tax credits or pandemic relief.
If your business received a PPP loan, you can still be eligible for the ERTC but cannot use those same wages applied towards PPP loan forgiveness.
For 2020, there is an annual cap of $10,000 of qualified wages per employee across all quarters combined; multiply these qualified wages up to this cap by 50% to determine your credit amount which has a maximum of $5,000 per employee throughout the year.
For 2021 however, there is a quarterly cap of $10,000 of qualified wages per employee; multiply these qualified wages up to this cap by 70% in order to calculate your credit amount which has a maximum of $7,000 per employee each quarter.
Be aware that scammers have been known take advantage of individuals trying to claim an ERTC so it’s best practice not only consult with professionals such as certified public accountants (CPAs) or attorneys but also pay special attention when reading archived Health Orders and IRS Notices like N2021-20 which provides significant detail on what constitutes a full/partial suspension of operations – especially FAQs #17 & #18!
Lastly remember there is no cap on number of employees although it’s easier for small businesses taking advantage since they will likely experience less administrative paperwork than larger companies.
Check your qualifications and eligibility
Calculating the Credit
To calculate the ERTC, you’ll need to know how much qualified wages you’ve paid and the applicable cap for the year or quarter. The qualified wages include all forms of wages that are subject to FICA taxes, as well as tips that are considered Medicare wages.
In 2020, businesses with 100 or fewer full-time employees may include qualified wages for all employees when calculating the credit up to an annual cap of $10,000 per employee. Multiply this amount by 50% to determine your credit amount for 2020; the maximum is $5,000 per employee for the entire year.
In 2021, businesses with 500 or more full-time employees may be eligible for a higher cap on their credits. The quarterly cap in 2021 is $10,000 per employee and must be multiplied by 70% to determine your credit amount; the maximum is $7,000 per employee per quarter.
Remember that you cannot use wages applied to your PPP loan forgiveness to your ERTC – this would constitute double benefit and could lead to an audit from the IRS.
Keep in mind that you should consult with a Certified Public Accountant (CPA) or attorney for specific advice on how best to take advantage of this tax credit program based on your individual business’s circumstances.
Additionally, review archived Health Orders and Directives from San Francisco Department of Public Health as well as IRS Notice N2021-20 so you can make an informed determination about eligibility requirements and calculation of credits.
Finally, beware of scammers who try and claim an ERTC fraudulently – make sure you understand all rules before submitting any paperwork related to this tax credit program so you don’t end up getting scammed out of money or facing legal action from the IRS later down the line!
Qualified Wages
As a business owner, you can use the ERTC to reward your team for their hard work during these trying times, with qualified wages up to the yearly or quarterly cap.
Qualified wages are all forms of wages that are subject to FICA taxes and tips may be considered qualified wages for the purposes of ERTC as long as they are Medicare wages. This means any salary or hourly wage, vacation pay, sick pay, health insurance benefits, and more could all qualify towards your employee retention tax credit.
It is important to note that a business may not double benefit by utilizing the same wages for claiming the ERTC and other tax credits or pandemic relief.
In 2020, businesses with 100 or fewer full-time employees may include qualified wages for all employees when calculating the credit. For 2021, however, that threshold is raised to 500 or more full-time employees.
Additionally in 2020 apply a cap of $10,000 of qualified wages per employee across all quarters combined and multiply the qualified wages up to the annual cap by 50% to determine your credit amount for 2020 with maximum being $5,000 per employee for the entire year.
In 2021 meanwhile apply a cap of $10,000 of qualified wages per employee per individual quarter and multiply the qualified wages up to the quarterly cap by 70% which would yield maximum being $7000 per employee per quarter.
It is important that businesses keep records regarding their ERTC qualification process including copies of payroll records showing total taxable compensation paid during applicable periods as well as any documentation from state/local governments related to suspension orders due COVID-19 pandemic etc.
Lastly if your business received PPP loan you may still be eligible for ETRC but cannot use those same funds towards its forgiveness on PPP loan in order not to double count them under different categories like mentioned before. Be aware though that IRS Notice N2021-20 provides significant detail on what constitutes a full or partial suspension of operations so it’s best advised consulting this document when making an informed determination about using this particular tax credit opportunity available at this time period post covid 19 pandemic.
Check your qualifications and eligibility
Claiming the Credit
Claiming the ERTC can be a great way to reward your team and provide financial relief for your business.
To start, it’s important to understand which types of wages are eligible for the credit. Qualified wages include all forms of wages that are subject to FICA taxes, including tips as long as they are Medicare wages. The total amount of qualified wages must not exceed $10,000 per employee across all quarters combined in 2020, or $10,000 per employee per quarter in 2021. The maximum tax credit is either $5,000 or $7,000 depending on the year.
When you’re ready to claim the credit, you will need to fill out Form 941-X with your quarterly returns. You may also be able to make an advance payment by filing Form 7200 with the IRS and requesting an advance refundable tax credit based on estimated qualified wages paid during each quarter of 2020 or 2021.
It’s important not to double benefit from claiming both this credits and other pandemic relief programs such as PPP loans – you cannot use any wages applied towards loan forgiveness when calculating your ERTC amount.
The process can seem complex but taking advantage of this valuable incentive is worth it in the end! Make sure you consult an experienced CPA or attorney before moving forward with claiming your ERTC amounts as there may be different eligibility rules that apply based on your individual situation.
Finally, it’s essential that you pay close attention to FAQs #17 and #18 from IRS Notice N2021-20 when determining if you qualify for this tax break so that no detail is overlooked!
Documentation Requirements
Once you’ve determined your eligibility, there are a few documents you’ll need to provide in order to claim the ERTC.
You will need documentation that proves you were eligible for the credit, including evidence of wages paid and any government orders or directives related to your business. You will also need payroll tax returns from 2019, 2020, and 2021 that show the number of employees and total amount of qualified wages paid during those years.
Additionally, documentation should confirm whether or not your business was closed due to COVID-19. To prove a partial suspension of operations due to COVID-19, it is important to have records showing what activities were limited or stopped altogether. Lastly, if applicable, you may need information regarding PPP loans received by your business and how they corresponded with employee wages used as part of the loan forgiveness calculation.
When filing for your ERTC credit with the IRS, it’s important that all necessary documents are included in order for them to process and approve your claim. Without this documentation they won’t be able to determine if you qualify for the credit at all, much less calculate how much credit is due.
It’s also important that all paperwork is organized properly so that it can easily be reviewed by an IRS auditor in case of an audit later on down the road.
It’s recommended that businesses keep copies of all documents pertaining to their ERTC claim in an organized fashion for future reference just in case additional information is needed later on down the road when filing taxes again or when responding to audit requests from the IRS. This way businesses have everything ready at their fingertips instead of having to go back through months worth of financial data looking for specific pieces of information needed by the government agencies.
Keeping these records readily available can save time and effort while ensuring accuracy when submitting tax forms each year which can be very beneficial over time for both employers and employees alike.
The key takeaway here is that proper documentation is essential when claiming ERTC credits from the IRS since they require proof before approving any refundable amounts back into taxpayers’ pocketbooks or accounts. Having such records readily available upon request makes this process easier overall, so make sure you keep good track paper trails surrounding your claims!
Filing a Claim
Now that you’ve gathered the necessary documents, it’s time to file your ERTC claim and get back some of that hard-earned cash!
You will need to complete Form 941 for each quarter in which you want to claim the credit. This form is used to report payroll taxes and wages paid to employees, as well as other types of payments related to employment, such as vacation pay or tips. Make sure you include all qualified wages up to the annual or quarterly cap when filling out this form.
Additionally, you must also attach a completed Schedule R (Form 941) with your Form 941 filing. This schedule provides information about the total number of full-time employees employed during each quarter in 2020 and 2021.
To file your claim for the ERTC, submit these forms along with any applicable supporting documents via mail or e-file.
It is important to note that if you receive a PPP loan after filing your Form 941 for any given quarter, there are additional steps required before claiming the ERTC for that same period.
In addition, if you have 500 or more full-time employees in 2021, it’s recommended that you use IRS approved tax software applications instead of submitting paper returns by mail.
Once all information has been submitted electronically or by mail, it typically takes 8–10 weeks for processing and approval from the Internal Revenue Service (IRS). If approved for an ERTC credit refund amount greater than zero dollars ($0), then expect either a direct deposit into a designated bank account within three weeks or a check mailed directly from the IRS within four weeks thereafter.
Keep in mind that businesses who receive PPP loans are still eligible for an ERTC claim but may not double benefit by utilizing their PPP loan funds towards their credit amount calculation; therefore be mindful when entering qualifying wages on Form 941 so no double counting occurs inadvertently between credits claimed under different programs such as ERCP and PPP Loan Forgiveness Program requirements.
Check your qualifications and eligibility
Conclusion
You’ve learned how the Employee Retention Tax Credit works and what you need to do to claim it.
Now that you have all the information, it’s time to make sure you meet the eligibility requirements.
Once you’ve taken care of that, you can start calculating your credit amount, claiming the credit, and submitting all necessary documentation.
It’s important to remember that filing a claim can be tricky, so make sure to review everything carefully before submitting.
With this in mind, you should be well on your way to taking advantage of this great program!