Is the employee retention credit program for employers only, or can employees claim it separately for themselves?
In these challenging times, businesses owners and employees seek financial relief and stability. One significant source of support comes from the Employee Retention Credit (ERC), a refundable tax credit developed to help employers keep their workforce intact during the COVID-19 pandemic.
The quick answer is that yes the ERC credit is beneficial for W-2 employees, however, only employers can claim the credit for the business where the employee worked during 2020 and 2021 tax year.
If you have not already filed, you can still claim the employee retention credit retroactively in 2023, 2024, and 2025.
Understanding If the Employee Retention Credit (ERC) is Only For Employees
The Employee Retention Credit (ERC) is a refundable tax credit designed to encourage employers of any size who paid qualified wages to their employees during the COVID-19 pandemic to keep employees on their payroll.
Definition And Purpose of The ERC Credit For Employees
The Employee Retention Credit (ERC) is a refundable tax credit designed to support small to medium-sized businesses during the COVID-19 pandemic. Its purpose is to provide financial incentives for employers to retain their employees and continue paying wages, even amidst economic challenges brought on by the pandemic.
By offering up to 50% of qualified wages per employee per quarter as a tax credit, the ERC aims to ease some of the financial burdens businesses face during these trying times.
For example, a restaurant that suffered revenue losses due to lockdowns but continued paying its staff could benefit from this program, which would allow them to keep its doors open and offer job stability and income security for its workforce.
Employee’s Maximum Credit Amount And Duration
The Employee Retention Credit (ERC) offers a substantial financial incentive for eligible employers, covering up to 50% of qualified employee wages. The maximum credit amount an employer can claim is $10,000 per employee per quarter, providing significant monetary support for small to medium-sized businesses during these challenging times.
To illustrate this program’s potential benefits, let’s look at a real-world example. Consider a small business with ten full-time employees earning $4,000 per month.
If the company qualifies for the ERC based on its gross receipts or operational status due to COVID-19 restrictions, it could receive up to $20,000 in credits per employee throughout the qualifying period.
Eligibility Criteria For Employers
Eligibility criteria for the employers qualify to benefit from the Employee Retention Credit include the following factors:
1. Due to government orders, business operations must have been impacted by COVID-19, evidenced by a significant decline in gross receipts or partial/full suspension.
2. Employers must have experienced a decline in gross receipts of more than 20% compared to the same calendar fourth quarter of 2019/2020, depending on the year applying for.
3. The credit is available for eligible employers of any size; however, rules may differ based on the employer’s size and the number of employees.
4. Qualified wages paid to employees during eligible quarters should be within set limits by the ERC guidelines.
5. Employers who have received a Paycheck Protection Program (PPP) loan are ineligible, as well as government entities and certain tax-exempt organizations.
Utilizing these eligibility criteria will help Small to Medium-Sized Business Owners better understand if they can claim and benefit from the Employee Retention Credit during this challenging economic climate.
Benefits Of The Employee Retention Tax Credit (ERTC) For Employers
The Employee Retention Credit provides financial relief for eligible employers, helps retain their employees during difficult times such as the COVID-19 pandemic, and allows them to take advantage of tax benefits they might not have been able to access otherwise.
Helps Businesses To Retain Employees
The Employee Retention Credit (ERTC) can be incredibly helpful for businesses trying to retain employees during uncertain times. By providing financial relief, the ERTC allows eligible employers to continue paying their workers and avoid layoffs or furloughs.
For example, imagine a small retail business that experienced a significant decline in revenue during the pandemic. The business utilized the ERTC as part of its financial strategy to keep its employees on staff and avoid layoffs.
As a result, they could continue paying their workers’ wages without having to dip into savings or take out loans.
Provides Financial Relief For Businesses
The Employee Retention Credit (ERTC) offers significant financial relief for eligible businesses struggling to keep their doors open during challenging economic times. For example, the credit allows businesses to retain employees and receive a refundable tax credit against certain employment taxes.
Moreover, the ERTC applies retroactively to wages paid as far back as March 13th, 2020, providing additional financial support for businesses affected by COVID-19. Additionally, the credit allows employers who received Paycheck Protection Program (PPP) loans to double-dip on benefits since they could not claim both PPP loan forgiveness and ERTC before December 31st, 2020.
Tax Benefits For Employees
In addition to employer benefits, the Employee Retention Credit (ERTC) also provides employee tax benefits. The credit allows eligible employers to continue paying their employees, reducing the need for layoffs and ensuring job security.
This employment stability also means employees can count on stable wages during financial uncertainty. Furthermore, any qualified health plan expenses paid by the employer on behalf of eligible employees are included in the number of qualified wages eligible for the ERTC.
This means that employees may have access to continued health care coverage even if their hours are reduced, or they are temporarily furloughed.
Benefits Of The Employee Retention Credit For Employees
Employees benefit from the Employee Retention Credit through job security, wage stability, access to benefits, and potential for future growth with their current employer.
The Employee Retention Credit (ERTC) can provide small to medium-sized business owners with the financial support they need to maintain job security for their employees during uncertain times.
By offering a refundable tax credit designed to encourage employers to keep their workers on the payroll, businesses can reduce the risk of layoffs and retain valuable talent.
This benefit helps individual employees feel more secure in their jobs and contributes to a more stable workforce overall.
The Employee Retention Credit (ERC) provides wage stability to eligible employees of small to medium-sized businesses during the COVID-19 pandemic. This refundable tax credit allows employers to claim up to 50% of the qualified wages paid to an employee, including certain health insurance costs, for a maximum of $10,000 per employee per quarter.
For example, imagine a small retail business forced to shut down due to government orders during the pandemic. The business owner would be eligible for the ERC and could use it to keep their employees on the payroll despite being unable to operate in-store.
Overall, wage stability is critical in retaining valuable staff members during uncertain times like these.
Access To Benefits
In addition to job security and wage stability, the Employee Retention Credit (ERC) also provides eligible employees with access to benefits. This is especially important during the ongoing COVID-19 pandemic, when many individuals face health and financial challenges.
Qualifying employers can claim up to 50% of an employee’s wages for certain health insurance costs paid on their behalf, which helps ensure that employees have access to healthcare coverage.
Additionally, by retaining their workforce through the ERC, businesses may be better equipped to offer other benefits, such as retirement plans or paid time off, promoting long-term growth and employee loyalty.
Examples: A small business owner who could retain her employees by utilizing the ERC found that it provided her staff members with much-needed healthcare coverage during a difficult time.
Potential For Future Growth
In addition to the immediate financial relief and job security benefits, the Employee Retention Credit can also position businesses for future growth.
Retaining employees during tough times can help businesses bounce back quicker when conditions improve. Employees who feel valued and secure in their positions are more likely to stay with a company long-term and be loyal advocates for the business.
By retaining key employees, businesses can maintain essential skills and knowledge, which is especially important in competitive industries. Additionally, keeping payroll costs lower through claiming the credit can free up funds that could be reinvested into improving operations or expanding services/products offered.
Employees Eligibility For The ERC Credit
Read on to find out if you are eligible for the Employee Retention Credit, including specific criteria related to reductions in gross receipts and partial or full suspension of business operations.
Reduction Of Gross Receipts
To qualify for the Employee Retention Credit (ERC), eligible employers must have experienced a significant decline in gross receipts due to the pandemic. An employer must have experienced a decline of at least 20% in their gross receipts to be eligible for the credit.
This reduction can be determined by comparing gross receipts from a calendar quarter in 2020 or 2021 to the same quarter in 2019. Eligible employers may also qualify if their business was fully or partially suspended during any calendar quarter due to government orders related to COVID-19.
It’s important to note that employers cannot claim the ERC and the Paycheck Protection Program (PPP) loan for the same wages. However, eligible employers who receive PPP loans can still qualify for the ERC concerning wages not paid for with forgiven PPP proceeds. It’s recommended that small to medium-sized business owners work with their tax professional or accountant to ensure they meet all eligibility requirements and properly apply for the ERC.
Partial Or Full Suspension Of Business Operations
Businesses forced to partially or fully suspend their operations due to a government order may be eligible for the Employee Retention Credit. This includes businesses closing their physical locations, shifting to remote work, or reducing their operating hours.
– Eligible wages and other expenses
Qualified wages include wages paid to employees during the suspension period and certain health insurance costs. Additionally, employers may claim to pay qualified wages for expenses related to maintaining the business during the suspension period, such as rent, utilities, and mortgage interest.
– Reduction in the credit amount
Suppose an employer experienced a significant decline in gross receipts and a partial or full suspension of operations. In that case, they may only claim up to 50% of qualified wages paid during the suspension period. The total credit amount cannot exceed $10,000 per employee per calendar quarter.
– Interaction with other relief programs
Employers who receive a Paycheck Protection Program loan may not claim the Employee Retention Credit for wages paid with forgiven PPP funds. However, employers who received a PPP loan but did not use it for payroll costs can still claim the credit. Additionally, businesses cannot claim employer credits for the ERTC and Work Opportunity Tax Credit for the same employee.
– Documentation needed
To claim the Employee Retention Credit for a partial or full suspension of operations, employers must provide documentation proving that they were required to suspend their business due to a government order related to COVID-19. This could include copies of state-mandated stay-at-home orders or closure notices from local officials.
The partial or full suspension of business operations is one of several conditions that make a business eligible for the Employee Retention Credit. By understanding these eligibility criteria and carefully documenting qualifying expenses and wage payments, small to medium-sized business owners can take advantage of this valuable tax credit designed to help retain employees during challenging times.
Impact Of COVID-19 On Business Operations
The COVID-19 pandemic has caused widespread disruptions to businesses across various sectors. Many businesses have had to temporarily or permanently shut down due to government-mandated restrictions and reduced consumer demand.
As a result of these disruptions, many employers have been forced to reduce their workforce or cut back on employee hours.
The Employee Retention Credit (ERTC) was introduced as part of the CARES Act in 2020 to help eligible employers retain their employees during this difficult time. The employee retention credit refund also provides financial relief by allowing eligible employers to claim a refundable tax credit against certain employment taxes equal to 50% of qualified wages paid per quarter, up to $10,000 per employee.
Calculation And Claiming The Employee Retention Credit for Employees
To learn how to calculate and claim the Employee Retention Credit, including eligible wages, refundable vs.
Eligible Wages And Other Expenses
Qualified wages are those paid to eligible employees by the employer, including certain health insurance costs paid to the employee. The following wages and expenses are eligible for the Employee Retention Credit:
1. Wages paid between March 13th, 2020, and December 31st, 2022.
2. Qualified health plan expenses that are properly allocable to qualified wages.
3. Employer-provided qualified sick and family leave wages for which a tax credit is already provided under the Families First Coronavirus Response Act (FFCRA).
4. Pre-tax contributions made by employees toward health care plans.
To claim the credit, employers must report their qualified wages and related expenses on their employment tax returns, such as Form 941 and Employer’s Quarterly Federal Tax Return. The credit is applied against certain employment taxes deposited with the IRS, including federal income tax withheld from employee wages and employer and employee shares of Social Security and Medicare taxes.
It is essential to maintain proper documentation when claiming the Employee Retention Credit because supporting records must be kept for at least four years after filing or paying taxes. Eligible employers who fail to keep adequate records may lose all or part of their claimed employee retention credits upon audit by the IRS.
Remember that eligible employers can only claim one COVID-19-related tax credit (ERC or PPP) for each wage dollar used in calculating the credit amount. Therefore, if an employer has received a Paycheck Protection Program loan, they cannot also claim the Employee Retention Credit on those same wages.
Refundable Vs. Non-refundable Credit
The Employee Retention Credit (ERTC) is a fully refundable payroll tax credit amount, meaning eligible employers can claim the full credit even if it exceeds their total tax liability.
For example, if an eligible employer claimed $10,000 in ERTC for a qualifying employee but only owed $7,000 in payroll taxes, they would receive a refund of $3,000.
This distinction is important because it provides greater flexibility and financial relief for businesses struggling during these challenging times.
Filing Requirements And Deadlines
To claim the Employee Retention Credit (ERC), eligible employers must report their eligible wages and other expenses on their employment tax returns. The credit is claimed on IRS Form 941, filed quarterly by most employers.
For example, for the first quarter of 2021, eligible employers can claim up to $7,000 in ERC for each employee per quarter.
Employers claiming the credit should keep detailed records and documentation to support their eligibility and credit calculation. They should also ensure that they meet all filing requirements and deadlines set forth by the IRS.
Failure to file correctly or timely could result in a delay or denial of the credit.
To claim the Employee Retention Credit (ERC), eligible employers are required to submit certain documentation, including:
1. Documentation proving eligibility for the credit, such as financial statements showing a significant decline in gross receipts or suspension of business operations.
2. Documentation supporting the amount of the qualified employee wages and wages paid, including payroll records and tax forms.
3. A statement explaining how the business meets the eligibility criteria and calculates the credit amount claimed.
4. Any other documentation the Internal Revenue Service (IRS) requests to support the claim.
Businesses must keep accurate records and maintain proper documentation to support their ERC claims. Failure to provide adequate documentation could result in delayed or denied claims and potential penalties from the IRS.
Business owners should consult their tax advisors and review all necessary documentation requirements before claiming the ERC on their tax returns.
Interaction Of The ERC With Other COVID-19 Relief Programs
The Employee Retention Credit (ERC) can be claimed in conjunction with other COVID-19 relief programs, such as the Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL) program, and other tax credits and deductions.
Paycheck Protection Program (PPP)
The Paycheck Protection Program (PPP) is a loan program designed to provide financial assistance to small businesses during the COVID-19 pandemic. The PPP aims to help businesses keep their workforce employed by providing funds for payroll, rent, and other eligible expenses.
Although it’s important to note that employers who received PPP loans can claim the ERTC on wages that were not paid with forgiven loan proceeds, any wages paid during the covered period may qualify to claim the credit.
The Employee Retention Credit (ERC) is available to employers who have received Economic Injury Disaster Loans (EIDLs), but there are limits on how the credit can be used.
The maximum amount of qualified wages that can be counted towards the ERC is reduced by any EIDL advance payment received, and any wages paid with EIDL funds cannot be counted towards the credit.
It is important to note that receiving an EIDL loan does not automatically disqualify a business from claiming the ERC. Many businesses have successfully claimed both credits to help them stay afloat during these challenging times.
Other Tax Credits And Deductions
In addition to the Employee Retention Credit, other tax credits and deductions are available to small to medium-sized business owners. For example, the Work Opportunity Tax Credit (WOTC) is a federal tax credit that provides financial incentives for businesses that hire individuals from certain targeted groups who face significant barriers to employment.
Another tax credit is the Research and Development (R&D) Tax Credit which allows eligible small businesses to receive a credit for expenses incurred in developing new products or processes.
Finally, various deductions are available such as those related to health insurance premiums and payroll taxes paid by employers on behalf of their employees.
Examples of Eligible Employers For The ERTC
Examples of eligible employers for the ERC include businesses that experienced a significant decline in revenue and businesses that were fully or partially suspended due to government orders during the pandemic.
Businesses That Experienced A Significant Decline In Revenue
During the pandemic, many businesses experienced a significant decline in gross receipts due to reduced consumer spending and various restrictions. These businesses may be eligible for the Employee Retention Credit (ERTC) if they meet the following criteria:
– The business’s gross receipts have declined by at least 20% compared to the same quarter in 2019.
– The decline must be sustained for two consecutive quarters or until the end of the credit-generating period.
– For employers with fewer than 500 employees, all wages paid during a qualified quarter are eligible for the credit, while larger employers can only claim the credit for wages paid to employees not providing services.
The ERTC provides financial relief to these struggling businesses by allowing them to claim a tax credit against certain employment taxes. This helps businesses retain employees and encourages them to continue operations during challenging times. Additionally, eligible employees benefit from job security and stable wages.
Business owners need to understand the rules and regulations surrounding the ERTC and how it can benefit their company. By properly calculating and claiming this credit on their tax returns, business owners can receive up to $7,000 per employee per quarter towards qualifying wages paid between March 13th, 2020, through December 31st, 2022.
Businesses That Were Fully Or Partially Suspended Due To Government Orders
Many businesses were forced to close partially or completely during the pandemic due to government orders. These businesses may be eligible for the Employee Retention Credit if they continue to pay their employees during this time. Here are some important points to keep in mind:
– To be eligible for the credit, businesses must have been fully or partially suspended due to government orders related to COVID-19.
– Businesses that could operate remotely or make alternative arrangements while closed may still be eligible if they could not generate significant revenue during this time.
– The credit applies from March 13th, 2020, through December 31st, 2022, and can be claimed on employment tax returns filed for those periods.
– Eligible wages include those paid to employees during the suspension period and those paid after reopening but before returning to full operations.
– The maximum credit amount for each employee is $7,000 per quarter.
If your business was impacted by government closures during the pandemic, you might want to explore whether you are eligible for the Employee Retention Credit. It can provide valuable financial relief and help ensure that you can retain your employees even during difficult times.
Examples of Ineligible Employers For The ERTC
Ineligible employers for the ERC include those who received a Paycheck Protection Program loan and government entities, but there are still many other businesses that may qualify.
Businesses That Received A Paycheck Protection Program Loan
If your business received a Paycheck Protection Program (PPP) loan, you might still be eligible for the Employee Retention Credit (ERC). However, there are some limitations and restrictions to keep in mind:
1. The same wages cannot be used for PPP loan forgiveness and ERC calculations. This means that if you used PPP funds to pay employee wages during a covered period, those wages could not be used to calculate the ERC.
2. If you received a PPP loan before December 27th, 2020, you were originally not eligible for the ERC. However, recent legislation has made it possible for businesses with a PPP loan to claim the credit retroactively for 2020 if they meet certain criteria.
3. For 2021, businesses with a PPP loan may still be eligible for the ERC if they use different wages than those used for PPP loan forgiveness calculations.
It’s important to note that claiming the PPP loan and ERC can be complex and requires careful consideration of eligibility requirements and proper documentation. Consult with a qualified tax professional to determine your eligibility and ensure compliance with all regulations.
Government entities are generally not eligible for the Employee Retention Credit (ERC) unless they are tax-exempt organizations under Section 501(c) of the Internal Revenue Code.
Their operations have been partially or fully suspended due to government orders. This means federal, state, and local governments are not eligible for the ERC, including public schools and universities. However, if they meet specific criteria, certain entities considered hybrids between government and private organizations may be eligible for the employee retention tax credit. It is important to consult with a tax professional to determine eligibility for the ERC as a government entity.
Future Of The Employee Retention Credit
The future of the Employee Retention Credit remains uncertain, with proposed legislation extending the credit beyond its current expiration date and increasing the maximum credit amount, providing further benefits for eligible employers and employees alike.
The Employee Retention Credit (ERTC) has been extended through December 31st, 2022, by the Consolidated Appropriations Act of 2021. Additionally, there have been proposals to expand and modify the ERTC as part of ongoing COVID-19 relief efforts.
For example, there is a proposal to increase the credit rate from 50% to 70%, allowing employers to claim up to $28,000 per employee for all four quarters in which they are eligible.
Small to medium-sized business owners must stay informed about any changes or expansions in ERTC legislation because it could impact their eligibility for the credit and how much they can claim.
Implications For Businesses And Employees
The Employee Retention Credit (ERC) can be a valuable financial relief for employers and employees. For businesses, the credit incentivizes retaining employees during difficult times while offering tax benefits for eligible wages.
On the other hand, employees benefit from the employee retention credit work, with wage stability, access to health insurance benefits, and potential for future growth within the company as it stays operational through tough times.
By claiming this refundable tax credit on their employment taxes return, small-to-medium-sized business owners may maximize their cash position until they see improvement in their bottom-line sales numbers.
Best Practices For Claiming The ERC
To ensure a smooth process for claiming the Employee Retention Credit, follow these best practices:
1. Keep accurate records: Maintain detailed records of all qualified wages and any other expenses related to the credit, including health insurance costs.
2. Stay informed about eligibility requirements: Regularly review the IRS guidelines to ensure your business meets all eligibility criteria for claiming the ERC.
3. Work with a tax professional: Seek advice from a tax professional who can help you navigate complex tax laws and maximize the benefits of the ERC.
4. Claim the credit on time: Ensure that you claim the credit on time by filing applicable employment tax returns or requesting advance payments of the full refundable payroll tax credit amount.
5. Review your payroll system: Check that your payroll system accurately tracks qualified wages and employment tax deposits, which are required for claiming the ERC.
By following these best practices, small to medium-sized business owners can take advantage of the Employee Retention Credit and provide financial relief for their business while retaining their valued employees during difficult times.
Conclusion and Summary Answering the Question: Is The Employee Retention Credit For Employees?
In conclusion, the Employee Retention Credit (ERC) is a crucial lifeline for small to medium-sized businesses affected by the COVID-19 pandemic. The credit incentivizes employers to keep their employees on the payroll and helps prevent unemployment during these challenging times.
Eligible employers can claim up to 70% of qualifying wages paid each quarter, which amounts to significant savings on employment taxes.
To claim the ERC, business owners must meet specific eligibility criteria and follow instructions on calculating and filing for the credit accurately. Examples of eligible employers include those who experienced a significant decline in revenue or partial or full suspension of business operations due to government orders.
Overall, considering applying for the ERC could be an excellent way to support your business’s finances while keeping your valued employees employed during these unprecedented times.
Good news. There is still time to file! The employee retention tax credit can still be claimed retroactively and there is still time to file, even in 2023, 2024, and 2025 for the past tax years.
Employee Retention Tax Credit (ERC / ERTC) Help: Claim Up To a $26,000 Refund Per Employee for Your Business
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Depending on eligibility, business owners can receive up to $26,000 to $33,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.
The ERC / ERTC Program is a valuable IRS tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.
Schedule Your Free Employee Retention Credit Consultation to see what amount $ of employee retention tax credit your company qualifies for.