How Does the Employee Retention Credit Affect Tax Returns?

ERC tax returns
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It’s time to file your business’s tax return. Are you getting all the tax credits you deserve? Are you eligible for the Employee Retention Credit?

The Employee Retention Credit (ERC) could significantly reduce your tax burden. The rules can be complicated, though. You must file your ERC tax returns correctly.

Learn more about the ERC and whether your business qualifies. You can find the help you need to properly file your ERC tax returns.

What Is the Employee Retention Tax Credit?

The Employee Retention Credit is a refundable tax credit for qualified wages your business paid to employees. The credit applies to employment taxes like federal income tax withholding, FICA, and Medicare. The purpose of the credit was to encourage businesses to keep employees on the payroll even if the employees weren’t working due to the COVID-19 pandemic.

Congress created the ERC as part of the CARES Act in March 2020. It was one of many provisions to help struggling businesses. Congress later expanded the ERC in several legislative packages related to COVID-19 relief.

For the tax year 2021, eligible employers can receive a credit of up to 70% of each employee’s qualified wages. The maximum amount is $7,000 per employee per quarter.

For the tax year 2020, you could receive a credit of up to 50% of each employee’s qualified wages. The maximum amount is $5,000 per employee for the year.

How Does the ERC Affect Your Tax Return?

Employers can claim the Employee Retention Credit on their federal employment tax returns. This is usually your Quarterly Federal Tax Return, Form 941. You can amend your Form 941 if you didn’t claim the ERC and realize later that you qualified.

If your credit is more than the taxes you owe, you can ask the IRS to give you your refund in advance. This provision applies to businesses that had 500 or fewer full-time employees in 2019. You’ll use Form 7200 to request the advance.

You should file Form 7200 before the end of the month after the quarter where you paid the qualifying wages. 

Who Qualifies for the ERC?

Employers are eligible for the Employee Retention Credit if they engaged in a trade or business during 2020 and/or 2021 and:

  • A government order fully or partially shut down its operations, or
  • The business experienced a significant reduction in gross receipts

Non-profit businesses are eligible for the ERC. Some government entities like public universities and federal credit unions also qualify.

Businesses with 500 or fewer employees get the most relief from the ERC. Larger companies can also benefit, but the definition of qualifying wages is more restrictive.

ERC and Other COVID-19 Relief Measures

You can claim the ERC if you benefited from other COVID-19 programs. Congress loosened the restrictions through the CAA legislation.

If your business had a Paycheck Protection Program (PPP) loan, you can still claim the ERC. However, you can’t claim the ERC with the same wages you used to apply for PPP loan forgiveness. These conditions apply to PPP loans in 2020 or 2021.

You can claim the Families First Coronavirus Response Act (FFCRA) credit and the ERC credit if your business is eligible. You can’t use the same wages to claim both credits, though.

IRS Definition of “Partially Suspended” Business Operations

According to the IRS, a partial shutdown of business activities occurs when a government authority imposes restrictions. These limitations could impact commerce, travel, or group meetings. Capacity restrictions and “Stay at Home” orders are other examples.

How to Determine a Significant Reduction in Gross Receipts

For 2021, you’re eligible for the ERC if your revenue declined by 20% or more in a quarter. You can calculate the percentage of lost revenue against the same quarter in 2019 or the immediately preceding quarter in 2020 or 2021.

From March 13, 2020, through December 31, 2020, you had to lose at least 50% of your gross receipts. You can compare your quarterly revenue with the corresponding quarter in 2019.

What Are Qualifying Wages?

To properly file your ERC tax returns, you need to know how much you paid in qualifying wages. Qualified wages are the wages and other compensation you paid full-time equivalent employees in the relevant quarter. You can include qualified health plan expenses associated with those wages.

The number of full-time employees your business had in 2019 affects your qualifying wages. The IRS defines a full-time equivalent employee as an employee who worked at least 30 hours per week or 130 hours a month on average.

Businesses with more than 500 full-time employees in 2019 can only claim the ERC for wages paid to employees during non-working periods like a shutdown. Businesses with 500 or fewer full-time employees can claim the ERC for wages paid during working and non-working periods.

Latest Changes to the Employee Retention Credit

The Infrastructure Investment and Jobs Act made a significant change to the Employee Retention Credit. It retroactively ended the ERC for most businesses as of September 30, 2021. The deadline under earlier legislation was December 31, 2021.

Recovery Startup Businesses can still claim the ERC for the fourth quarter of 2021. A Recovery Startup Business is an employer that began operations on or after February 15, 2020. Your annual gross receipts must be less than $1 million.

Avoiding a Failure to Deposit Penalty

If your business is no longer eligible for the ERC in the fourth quarter of 2021, you may need to pay back the credit. You’ll need to make up the difference if:

  • You received an advance payment of your ERC credit, or
  • You reduced your employment tax deposits in preparation for the fourth quarter of 2021

Normally, a penalty for failure to deposit would apply for underpaying. You can avoid this penalty, though. If you received an advance payment, you should repay the amount by the due date of the relevant employment tax return.

If you reduced your tax deposits, you’ll need to meet several conditions including:

  • Having reduced your deposits in compliance with the legislation as it stood
  • Paying your deposits on or before the due date for wages paid on December 31, 2021
  • Reporting the tax liability from the cancellation of the ERC on your tax return for the period October 1, 2021, through December 31, 2021

You can apply to the IRS for reasonable cause relief if you don’t qualify under these rules.

Filing Your ERC Tax Returns

The Employee Retention Tax Credit can be a significant benefit for your business. If you qualify, you could save thousands of dollars per employee and potentially receive a refund in your cash flow. However, filing your ERC tax returns correctly can be complicated.

That’s where ERC Today can help. Our tax experts use a streamlined process to evaluate your situation and file your tax return quickly. We can securely handle your ERC filings or amended filings.

Contact us today for a free filing estimate. We’ll help you get all the tax credits you deserve.

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More Great Information For Employers:

On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act into law, and the Employee Retention Credit sunset date was moved from 12/31/2021 date to 9/30/2021 (for businesses other than ARPA Recovery Startup Businesses). 

HOWEVER, this does not mean the ERC was eliminated! Eligible businesses can still apply for stimulus funds based on financials between 3/13/2020-9/30/2021.