Curious to learn more about how to apply for Employee Retention Credit (ERC)? You’ve come to the right place!
The COVID-19 pandemic has severely impacted businesses and their employees, with many struggling to keep their doors open and maintain their workforce. To help these businesses, the government has introduced the Employee Retention Credit (ERC), which provides a tax credit to eligible employers who have faced business disruptions due to COVID-19.
In this post, we’ll guide you through the process of applying for the ERC and answer some of the frequently asked questions about this credit. Keep reading for the insight you need to apply for the ERC now.
How to File Your Employee Retention Credit
To claim the ERC, eligible employers must first determine their eligibility by reviewing the criteria set forth by the government. If eligible, employers can then claim the credit on their Form 941, Employer’s Quarterly Federal Tax Return, or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees. The credit can also be claimed on the employer’s Form 944, Employer’s Annual Federal Tax Return.
Once the employer has determined their eligibility and completed the necessary forms, they must submit them to the IRS along with any supporting documentation. It is recommended that employers keep records of all expenses and documentation related to the ERC, as they may be required to provide this information at a later date.
More on Form 941
Form 941 is the Employer’s Quarterly Federal Tax Return. This form is used to report income taxes, Social Security tax, and Medicare tax withheld from employee paychecks, as well as non-payroll items such as health insurance premiums and retirement plan contributions.
Form 941 should be completed and submitted to the IRS on a quarterly basis. The employer must remember that the ERC is entirely refundable through Form 941-X because their 6.2% share of Social Security tax was paid via the original Form 941 when it was filed. Keep in mind that Form 941-X, Line 30 is used to report qualified wages for the ERC.
Loving this post? Make sure to check out our other article about ERC support before you leave!
Employee Retention Credit Example
ERC calculations are based on total qualified wages, which include health plan expenses the employer pays to the employee. Equally important to note is that the ERC is equal to 50 percent of the qualified wages for 2020 and 70 percent for 2021, with the maximum credit amount for 2021 capped at $10,000.
To help illustrate how the ERC works, let’s consider the following example:
John owns a small retail store that has been impacted by the COVID-19 pandemic. Susan, one of his team members, gets paid $8,000 in wages and healthcare during quarter 2 of 2020, $6,000 during quarter 3, and $6,000 during quarter 4. His credit amount for Susan is $4,000 in Q2, $1,000 in Q3, and $0 in Q4. Once he hits the $5,000 cap, all additional wages paid to Susan no longer increase his credit amount.
But let’s say John’s employee in 2021, Tim, was paid $8,000 in Q1, $10,000 in Q2, $12,000 in Q3, and $12,000 in Q4. The credit amount available to John is $5,6000 for Quarter 1, $7,000 for Quarter 2, $7,000 for Quarter 3, and $0 for Quarter 4. Since the tax credit amount gets capped at $7,000 quarterly, Q4’s wages don’t qualify for the credit.
Employee Retention Credit FAQ
How does employee retention credit work?
The ERC provides a tax credit to eligible employers who have faced business disruptions due to COVID-19. The credit is equal to 50% of the first $10,000 in qualified wages per employee for each quarter and can be claimed on the employer’s quarterly or annual federal tax return.
Who qualifies for the employee retention credit?
Eligible employers include those that have experienced business disruptions due to COVID-19, such as a full or partial suspension of operations due to government orders or a significant decline in gross receipts. This should not be less than 10% of gross receipts or the hours of service the employee performed is not less than 10% of the number of hours of service all employees working for the employer’s business have performed.
How to apply for employee retention credit?
To apply for the ERC, eligible employers must determine their eligibility and complete the necessary forms, such as Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, along with their quarterly federal tax return. The forms must then be submitted to the IRS along with any supporting documentation.
What is the deadline for employee retention credit?
The deadline for the ERC varies depending on the employer’s tax status and the form they are using to claim the credit. Employers should check with the IRS for the specific deadline for their situation. But keep in mind that this is for operations that continued paying employees while impacted by the COVID-19 pandemic or experienced significant declines in their gross receipts between March 13, 2020 to December 31, 2021.
Is the employee retention credit taxable income?
No, the ERC is a tax credit and not taxable income. It is used to reduce an employer’s tax liability, resulting in a lower tax bill. This credit is not included in gross income for federal income tax purposes.
Can I claim employee retention credit and PPP?
No, employers can claim both the ERC and the Paycheck Protection Program (PPP) because the same wages cannot be claimed for both programs. Eligible employers that obtain a PPP loan are not allowed to claim the ERC, regardless of when they received the loan.
What can I spend the employee retention credit on?
The ERC is a tax credit that can be used to offset an employer’s federal tax liability. It cannot be used for any other purpose. Thus, you’ll need to use it to keep your employees on your payroll.
Can I still claim the employee retention credit?
Businesses are no longer able to pay wages to claim ERC. However, they have under 2024, and in some cases, 2025, to check their payroll from throughout the pandemic and claim the credit by filing an amended tax return.
What are qualified wages for the employee retention credit?
Qualified wages for the ERC include wages paid to employees who are not providing services due to COVID-19-related business disruptions, such as a government-mandated shutdown or a significant decline in gross receipts. The wages must also be included in the employee’s gross income and meet other criteria set forth by the government.
Do I have to pay back the employee retention credit?
No, the ERC is a tax credit and does not need to be repaid. This tax credit is to be used to help companies retain employees during the pandemic. It isn’t a loan and doesn’t have to be repaid.
How much is the ERC credit in 2023?
The amount of the ERC credit for 2023 has not been determined by the government at this time. Employers should check with the IRS for updates on the availability and amount of the credit they should expect as a refund.
When does the employee retention credit end?
The ERC is currently available for businesses that paid employees throughout the pandemic while experiencing significant shutdowns or declines in gross receipts from March 13, 2020 to December 31, 2021. The end date for the credit has not been determined by the government at this time. Employers should check with the IRS for updates on the availability of the credit beyond this time.
How long does it take to get an employee retention credit refund?
The time it takes to receive a refund for the ERC varies depending on the employer’s tax status and the form they’re using to claim the credit. Employers should check with the IRS for information on the specific timeline for their situation, but the IRS used to expect to give refunds within six weeks to six weeks following payroll report revision filings. However, we believe you should expect the turnaround time for a refund to arrive to be more like nine to twelve months.
Closing on ERC Applications
The Employee Retention Credit is a valuable resource for employers who have been impacted by the COVID-19 pandemic. But it’s equally essential for employers who are looking for ways to keep their employees on the payroll.
By following the guidelines outlined in this article and seeking assistance from the financial professionals at Northstar, eligible employers can successfully claim the ERC and receive the benefits it provides.
If you have any additional questions related to the ERC, please don’t hesitate to contact us as your tax professionals. The Northstar team is always ready to provide ERC advice and assistance!