Employee Retention Tax Credit Application: How To Apply ERTC (CARES Act)


Businesses, short, medium, and large, are greatly affected by the worldwide health crisis. Fortunately, the government ensured that employees were covered through the employee retention tax credit (ERTC). This encouraged employers to ensure their workers are well-compensated despite the market concern.

What is the Employee Retention Credit?

Companies can claim a refundable credit on qualified employee wages, composed of specific health insurance fees paid to employees. It encourages businesses and organizations to keep employees on their payrolls.

Moreover, Employee Retention Credit is a program created in response to the economic and pandemic crisis. It incentivizes small and large companies with a refundable tax credit for holding their payroll during 2020 and 2021.

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The credit is also available to all eligible employers of any size that pay qualified wages to their employees. However, additional rules apply to employers with fewer full-time employees.

According to the IRS, the max amount of qualified salaries taken for each employee for all calendar quarters is 10,000 USD. On the other hand, the maximum credit is 5,000 USD for eligible employers for qualified wages paid to any employee.

How Do the Credits Work?

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The American Rescue Plan Act specifies that companies must claim the nonrefundable portions of the employee retention tax credit against Medicare taxes. This is instead of against Social Security taxes, like in 2020. However, such modifications will only apply to salaries paid after the 30th of June in 2021 and will not alter the total credit payment.

Furthermore, if the credit transcends the employer’s total liability of Medicare or Social Security, the surplus is refunded to the employer. This depends on whether before the 30th of June in 2021 or after in any calendar quarter.

Lastly, at the end of the calendar quarter, companies will reconcile the quantities of credits on the employer’s Form 941.

What Employers Are Eligible for the Employee Retention Credit?

Most employers, such as hospitals, universities, colleges, and 501(c) institutions following the execution of the country’s Rescue Plan Act, can qualify for employee retention credit.

Before, the Consolidated Appropriations Act extended qualifications to include enterprises that took a loan under the Paycheck Protection Program (PPP). It has borrowers from the first round of the PPP loan who initially were ineligible to claim the tax credit.

Listed below are the conditions for employee retention credit qualifications for an eligible employer.

  • A business or trade that was suspended or had to decline company operating hours due to a government order significantly.
  • Enterprises shuttered but were able to resume their operations intact through telework.
  • An employer with a significant drop in gross receipts.
  • Businesses that are considered essential.

What are the considerable wages when calculating the retention credit?

All wages and compensation are subject to FICA taxes. It is crucial to note that companies can only take credit on salaries that are not expected to be forgiven under PPP.

The IRS has numerous ways of calculating qualified health expenses, depending on the situation. They may not include any after-tax amounts, or they can also include the employee and employer pre-tax portion.

On the other hand, when determining the qualified wages to include, an employer must first know the number of full-time employees working for them. According to the ACA, a full-time employee is anyone who has worked at least thirty hours per week or 130 hours in any calendar month in 2019.

Are Tipped Wages Included in Qualified Wages?

Under the IRS Notice 2021-49, the included tipped wages must be subject to FICA taxes. This consists of any tips over 20 USD in the calendar month. However, Tips that amount to less than 20 USD monthly and are not subject to FICA wages would not qualify for the retention credit.

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Things to Know Before Filing For Your Employee Retention Credit in 2023

Listed below are detailed explanations of things employers should know before filing their employee retention credit this year.

How to claim Employee Retention Credit

First, employers must fill out Form 941, Schedule R. To qualify for ERC credit, employers must have either experienced turmoil in company operations or decreased gross receipts. All recovery startup businesses allow for ERC, unlike PPP loans. Employers do not have to show a decline in revenues, but the grant is automatic if they have a drop.

The credit is equivalent to 50% of the qualifying wages spent on each employee through the end of 2021. In addition, employers should preserve their workforce at pre-pandemic levels.

How to calculate Employee Retention Credit

To estimate the employee retention credit, specify the number of eligible employees and the entire amount of qualifying wages paid to each of them during the pertinent quarter. Qualifying wages are capped at 10,000 USD per employee for every quarter.

For an employee who gets paid more than 10,000 USD in qualifying wages during a specific quarter, employers must count only 5,000 of those wages towards the credit.

After determining the total portion of the qualified wages paid, multiply the amount by 50%. To ensure accuracy, confer with a qualified tax consultant.

How much is the Employee Retention Credit

The maximum payment for qualified wages for each employee is 10,000 USD. This means the full credit an employer can receive is 5,000 USD per employee.

To be qualified for the retention credit, an employer should have been required to suspend operations or share a significant decline in gross receipts because of a governmental order related to the pandemic.

Further, employers must have retained their employees during particular periods and have paid them at least 600 USD in qualifying salaries. Such salaries include hourly pay, wages, commissions, and other types of compensation.

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How to file for employee retention credit

Firstly, businesses should file for a retention credit with the IRS. While they are at it, they must provide basic details about their firm and employees. It may include documentation showing they have been affected by the pandemic negatively.

The next step is for the IRS to review the application and decide whether the said enterprise is eligible for the worker retention credit. Once approved, the credit will be applied to employees’ future payroll taxes.

Essential Questions To Learn More About The Employee Retention Tax Credit

The following section includes the frequently asked questions regarding employee retention tax credit. Read through to learn more.

Is the employee retention credit taxable income?

ERCs are not considered taxable revenue for employees. It means employees will not have to pay additional taxes on wages that the ERC already covers.

For employers, the employee retention credit is treated as a Business Expense. They can use them to offset taxes owed. The employee retention credit is a valuable tax relief measure for employees and employers. Additionally, it can help retain key workers during these challenging times.

Can I claim employee retention credit and PPP?

Yes. However, if employers opt to take a PPP loan, they cannot claim the ERTC. Fortunately, the Consolidated Appropriations Act (CAA) enacted in December 2020 specified those smaller businesses grab the credit as long as they fulfilled all requirements and obeyed all the rules.

What can I spend the employee retention credit on?

If employers get up to 50% of 10,000 USD in wages for every quarter per employee, they are eligible for the ERC. The ERC is similar to a reimbursement.

Employees and employers cannot spend the credit on whatever they want. It would be helpful if they were in a recovery startup business.

Do I have to pay for the employee retention credit?

Not necessarily. They are treated as reimbursement in the form of employer credits. It is as if the money is what the government owes the individual. In other words, it is a loan that does not need a payback.

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How much is the ERC credit in 2023?

The ERC credit in 2023 for each employee is 26,000 USD or 11,000 USD on average. The amount depends on the salaries, health care costs, and other personnel expenditures business owners have paid through the relevant period.

How long would it take to get an employee retention credit refund?

Based on the recent information from the IRS, Form 941s that have been filed must expect to result in a repayment between six to ten months from the filing date. Qualified businesses may receive their credits shortly than six months to a year.

Final Thoughts – Employee Retention Tax Credit

The government put the Employee Retention Credit (ERC) in place to encourage businesses to keep people on the payroll throughout the global health crisis.

If the company’s gross income dropped significantly between 2020 and 2021 compared to 2019, it might be eligible for the ERC.

Although enterprises can no longer pay salaries to claim ERC, they have until 2024 or 2025 to reflect on their payrolls. The timeline must be during the pandemic. Moreover, they should retroactively claim the credits’ retention by filing an amended tax return.

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