Introduction to the Employee Retention Credit
The Employee Retention Credit is a refundable tax credit designed to help businesses affected by the COVID-19 pandemic. It provides a credit of up to 70% of qualified wages paid to employees between March 13, 2020, and December 31, 2021.
To be eligible, employers must have experienced a significant decline in gross receipts or have been forced to suspend operations due to government orders. The credit can be claimed on quarterly employment tax returns and is subject to certain limitations and phase-outs.
Determining Eligibility for the Employee Retention Credit
To determine eligibility, employers must assess their gross receipts and compare them to the same period in the previous year. A significant decline is defined as a 50% decline in gross receipts for any quarter in 2020 compared to the same quarter in 2019.
Alternatively, employers can qualify if they were forced to suspend operations due to government orders, such as stay-at-home orders or mandatory business closures. The suspension must have been more than a nominal portion of their business operations.
Calculating the Employee Retention Credit
The Employee Retention Credit is calculated based on qualified wages paid to employees during the eligible period. For 2020, the credit is 50% of qualified wages up to $10,000 per employee. For 2021, the credit is 70% of qualified wages up to $10,000 per employee per quarter.
Qualified wages include wages paid to employees who were not providing services due to government orders or whose services were reduced due to a decline in gross receipts. Employers can also include wages paid to employees who were furloughed or had their hours reduced.
Claiming the Employee Retention Credit
Employers can claim the Employee Retention Credit on their quarterly employment tax returns, Form 941. They must complete and attach Form 5884-B to their return to calculate and claim the credit.
Employers can also claim an advance payment of the credit by submitting Form 7200. This can help businesses with cash flow issues due to the pandemic. However, employers must reconcile the advance payment with their actual credit claimed on their quarterly return.
Common Mistakes to Avoid When Applying for the Employee Retention Credit
One common mistake is failing to accurately calculate qualified wages. Employers must carefully track and document wages paid to employees during the eligible period to ensure they are claiming the correct amount of credit.
Another mistake is not completing and attaching the required forms to their quarterly return. Employers must complete Form 5884-B and attach it to their return to claim the credit. Failure to do so may result in delays or denials of the credit.
Frequently Asked Questions
What is the deadline to apply for the Employee Retention Credit?
The deadline to apply for the Employee Retention Credit is the later of the due date for the quarterly employment tax return or the date that is 3 years after the date the original return was filed.
Can I claim the Employee Retention Credit if I received a PPP loan?
Yes, but only for wages that were not used to calculate PPP loan forgiveness. Employers must carefully track and document wages to ensure they are not double-counting.
How do I calculate qualified wages for the Employee Retention Credit?
Qualified wages include wages paid to employees who were not providing services due to government orders or whose services were reduced due to a decline in gross receipts.
Can I claim the Employee Retention Credit for all employees?
No, only for employees who were not providing services due to government orders or whose services were reduced due to a decline in gross receipts.
What is the maximum amount of the Employee Retention Credit I can claim?
The maximum amount is 70% of qualified wages up to $10,000 per employee per quarter for 2021, and 50% of qualified wages up to $10,000 per employee for 2020.
Do I need to amend my quarterly return to claim the Employee Retention Credit?
Yes, if you have already filed your quarterly return and want to claim the credit, you will need to file an amended return, Form 941-X.