Employee Retention Credit: Complete FAQs
This is the complete FAQs guide to ERC, here’s what you will learn:
Table of Contents
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What Is the Employee Retention Credit (ERC)?
The Employee Retention Credit (ERC) is a program established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial support to businesses that have faced financial difficulties due to the Covid-19 pandemic.
The ERC is a refundable tax credit, which means it is not a loan but a grant that can be claimed by eligible businesses as a reduction of their tax liability.
This credit is designed to help businesses offset the cost of retaining their employees during the pandemic.
The ERC is available to both small and mid-sized businesses, and the credit amount is based on the qualified wages and health care benefits paid to employees.
The ERC can be claimed for the year 2020 and three quarters of 2021, and it is important to note that the credit amount varies depending on the number of employees a business has.
How Does Employee Retention Credit Work?
The Employee Retention Credit (ERC) works by providing a tax credit to eligible employers to help offset the cost of keeping employees on payroll during the COVID-19 pandemic.
The credit is equal to 50% of the qualified wages paid to each employee, up to a maximum of $10,000 per employee per year.
Eligible employers include those whose operations have been fully or partially suspended as a result of a government order related to COVID-19, or those that have seen a significant decline in gross receipts.
To claim the credit, eligible employers must file Form 941 (Employer’s Quarterly Federal Tax Return) and report the qualified wages and credit on the form.
The credit can be applied against the employer’s portion of Social Security taxes and can be refunded to the employer if the credit exceeds the employer’s tax liability.
Who Qualifies for Employee Retention Credit?
How Do I Qualify for ERC?
You may qualify if:
- There was a government-mandated full or partial suspension of your business operations due to COVID-19 in 2020 or 2021, including restrictions on commerce, travel, or group meetings.
- You experienced a reduction in gross receipts compared to the same quarter in 2019, which has different criteria for 2020 and 2021.
Do I Need a Revenue Decline to Qualify?
No, you do not necessarily need a revenue decline to qualify.
Qualifying factors include changes in your operations as well as a reduction in revenue.
Can I Still Qualify If I Received PPP?
Yes, you can still qualify for the Employee Retention Credit if you received a Small Business Interruption Loan under the Paycheck Protection Program (PPP).
According to section 206(c) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, an eligible employer can claim the ERC even if they received a PPP loan.
What Qualifies as a Change in Operations?
Examples of changes in operations that may make you eligible for the Employee Retention Credit include:
- Changes in business hours
- Partial or full suspension of operations
- Supply chain or vendor shutdowns
- Reduction in services offered
- Reduction in the workforce or employee workloads
- Business disruptions (closure of divisions or departments)
- Inability to visit client job sites
- Delays in delivery of critical goods or materials from suppliers
- Additional spacing requirements for social distancing
- Changes in job roles/functions
- Tasks that can’t be performed from home or during remote work transition
- Lack of travel
- Lack of group meetings.
How to Fill Out 941x for Employee Retention Credit?
To claim the Employee Retention Credit (ERC) on Form 941-X, you’ll need to follow these steps:
Step 1: Gather Information
You’ll need information about your employees, including their names, Social Security numbers, and the number of qualified wages paid to each employee.
You’ll also need information about your business, including your employer identification number (EIN), the quarter in which the credit was claimed, and the amount of credit claimed.
Step 2: Complete Form 941-X
You’ll need to complete the appropriate sections of Form 941-X to report the information mentioned above.
You’ll need to provide the following information:
- The employer’s name, address, and EIN
- The quarter for which the credit is claimed
- The number of qualified wages paid to each employee
- The amount of the ERC claimed
Step 3: Calculate the Credit
You’ll need to calculate the amount of the ERC that you’re eligible to claim based on the qualified wages paid to your employees.
The credit is equal to 50% of the qualified wages paid, up to a maximum of $10,000 per employee per year.
Step 4: Submit the Form
Once you’ve completed Form 941-X, you should submit it to the IRS along with any supporting documentation, such as payroll records or government orders.
It’s important to keep accurate records of the qualified wages paid and the ERC claimed, as the IRS may audit your claim and request documentation to support your credit.
How to Apply for Employee Retention Credit?
To apply for the Employee Retention Credit (ERC), the following steps should be taken:
Step 1: Determine Eligibility
Review the eligibility requirements to determine if your business qualifies for the credit.
The requirements include having operations that were fully or partially suspended due to a government order related to COVID-19, or experiencing a significant decline in gross receipts.
Step 2: Calculate Qualified Wages
Determine the number of qualified wages you have paid to your employees during the year.
Qualified wages are those that are eligible for the credit and are capped at $10,000 per employee per year.
Step 3: File Form 941
Report the qualified wages and the credit on your quarterly Form 941 (Employer’s Quarterly Federal Tax Return).
You’ll need to include the number of qualified wages, the amount of the credit, and the name and Social Security number of each employee.
Step 4: Claim the Credit
You can claim the credit by reducing the amount of Social Security taxes owed.
If the credit exceeds the amount of Social Security taxes owed, you can request a refund by filing Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return).
How to Calculate Employee Retention Credit?
To calculate the Employee Retention Credit (ERC), you’ll need to follow these steps:
Step 1: Determine the Eligible Period
The ERC is available for qualified wages paid between March 13, 2020, and December 31, 2021.
Step 2: Determine Qualified Wages
Qualified wages are those that are eligible for the credit and are capped at $10,000 per employee per year.
The qualified wages are calculated based on the average number of employees during 2019 and the number of qualified wages paid during the year.
Step 3: Calculate the Credit Amount
The credit amount is equal to 50% of the qualified wages paid, up to a maximum of $10,000 per employee per year.
Here’s an example calculation of the ERC:
Let’s say a business has 10 employees, and each employee was paid $8,000 in qualified wages during the year.
The credit amount would be calculated as follows:
10 employees * $8,000 per employee = $80,000 in qualified wages
$80,000 in qualified wages * 50% = $40,000 in ERC
In this example, the business would be eligible to claim a $40,000 credit for the year.
What Is the Deadline for Employee Retention Credit?
The ERC must be claimed by filing an amended quarterly payroll tax return (Form 941X) with the Internal Revenue Service (IRS).
The deadline for filing this form depends on the quarter for which the credit is being claimed.
Once the IRS processes the form, a check will be issued to the taxpayer for the credit amount, along with any interest that may be owed.
It is important to note that the statute of limitations for filing amended payroll tax returns is three years from the due date of the return.
For example, to apply for the ERC for the 2nd quarter of 2020, the amended return must be submitted by July 2023.
This means that there is still time for eligible businesses to claim the credit.
If you have any questions or need assistance, you should consult a tax professional or the IRS for more information.
Can I Still Claim Employee Retention Credit for 2020 or 2021?
Yes, you may still be able to claim the Employee Retention Credit (ERC) for 2020 or 2021, as long as you meet the eligibility requirements and the credit has not yet been claimed for those tax years.
The ERC was available for qualified wages paid between March 13, 2020, and December 31, 2021, to employers whose operations were fully or partially suspended due to a government order related to COVID-19, or who experienced a significant decline in gross receipts.
To claim the ERC for 2020 or 2021, you’ll need to complete Form 941 (Employer’s Quarterly Federal Tax Return) and report the qualified wages and the credit.
If you need to file a corrected or amended return, you can do so using Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return).
Does Employee Retention Credit Have to Be Paid Back?
The Employee Retention Credit (ERC) does not have to be paid back, as long as it was claimed by the eligibility requirements and the applicable rules and regulations.
The ERC is a refundable tax credit, which means that if the credit amount exceeds the employer’s tax liability, the employer may receive a refund for the excess amount.
However, it’s important to note that the ERC is subject to audit by the IRS, and if the credit was claimed in error, or if the eligibility requirements were not met, the employer may be required to pay back the credit, plus interest and penalties.
How Long Does It Take to Get Employee Retention Credit Refund?
The time it takes to receive a refund for the Employee Retention Credit (ERC) depends on several factors, including the accuracy and completeness of your tax return, the processing time at the IRS, and any audits or verification procedures.
Typically, it takes the IRS several weeks to process a tax return and issue a refund.
However, during peak filing season, the processing time may be longer.
If your tax return is selected for audit or verification, the process may take several months or longer.
To check the status of your refund, you can use the “Where’s My Refund?” tool on the IRS website, or call the IRS Refund Hotline at (800) 829-1954.
Final Thoughts
If you’re considering applying for ERC, it’s important to act soon to ensure you can receive a refund if necessary.
Don’t wait until it’s too late!
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