The Employee Retention Credit (ERC) is a tax credit created under the CARES Act in 2020, expanded through the Consolidated Appropriations Act of 2021, and further through the American Rescue Plan Act of 2021. The ERC Tax Credit is a refundable payroll tax credit for employee salaries, wages, and healthcare insurance, offered as a relief measure to encourage businesses to keep employees on their payroll. The good news is, it’s not too late to retroactively file your ERC claim in 2023!
Leyton is here to help answer some of the most frequently asked questions regarding the Employee Retention Credit 2023. If you have not claimed this tax credit and believe you are eligible, our in-house tax professionals can help you take advantage before it’s too late! Calculate your potential benefit now!
What is the Employee Retention Tax Credit?
The Employee Retention Credit (ERC) is a refundable payroll tax credit that rewards employers that kept employees employed during the pandemic despite suffering the hardships of COVID.
The ERC is a tax credit that transforms into a tax-free refund once any payroll taxes owed to the IRS (employer’s share of social security taxes (FICA) March 31, 2020, to March 31, 2021/Medicare tax after March 31, 2021, to October of 2021) have been paid in full. This refund is tax free (see below rule for additional details) and can be used by the employer in any which way they want.
2020-2021 Employee Retention Credit Eligibility
There are two main paths to qualify for the Employee Retention Credit (ERC) 2023. A company can either qualify through the decline in gross receipts path (having more than a 50% decline in one quarter of 2020 GR compared to the same quarter in 2019 or having more than a 20% decline in one quarter of 2021 GR compared to the same quarter in 2019); or through the government shutdown path: the company experienced a full or partial suspension of its operations limiting commerce, travel, or group meetings due to COVID-19 and from following orders from any US governmental authority. In addition, if your company started during/after the pandemic you may qualify through the Recovery Startup Path.
The Employee Retention Credit allows a company to include all W2 employees’ wages (full time, part-time, and seasonal employees) that were paid during qualified periods during the pandemic. However, the related individual rules generally prevent the owner from claiming either themselves or their immediate family members for the credit and therefore must be excluded.
How do you calculate Employee Retention Credit in 2023?
In order to calculate the Employee Retention Credit in 2022 and 2023, for 2020 an employer must first see which quarters (1-4) they qualify for in that tax year. Once they have the qualifying periods, they next need to calculate how much credit each employee can be given. Qualifying wages are limited to being up to 50% of the first $10,000 of compensation per employee in 2020 with a maximum of $5,000 credit per employee for the year. For 2021, qualifying wages are limited to being up to 70% of the first $10,000 of compensation per employee for each qualifying quarter (generally there are 3 possible qualifying quarters). There is a maximum of $7,000 credit per employee for each qualifying quarter of 2021. So, a company that qualifies for all 3 quarters (1-3) of 2021, can get up to $21,000 max amount of credit that year. Use our calculator to discover your potential benefit in less than 1 minute.
Employee Retention Credit Qualifications
The Employee Retention Credits are calculated based on the qualifying wages paid to employees during eligible employer periods of 2020 and 2021. Under Section 2301(c)(5)(A) of the CARES Act, qualified wages include salaries and wages, bonuses, tips (if included on the w-2), and Health Insurance plans either paid by the Employer or by the employee. They do not include things like severance pay.
All types of businesses can qualify except those that are government/quasi-government in nature. While self-employed businesses can qualify, the related individual rules generally prevent them from successfully claiming the ERC.
Filing for the Employee Retention Credit
Can I still apply for the Employee Retention Credit in 2023? How do you file your ERTC?
Yes, a company can still apply for the Employee Retention Credit in 2023! In order to claim the ERTC you must fill out a Form 941-X, the quarterly payroll report you submit for your business each calendar quarter. A company is required to fill out the following:
– Refundable portion of the credit
– Any non-refundable portion of the credit
– Qualified wages used
– Any qualified health plan expenses used
– Detailed explanation on why the company is entitled to the credit
The general rule is that a company has up to 3 years from the due date of their original Form 941 that was filed with the IRS. Example: the filing period of the second quarter (April, May, June) is July 31st, one month after the calendar quarter ends. This time frame is called the period of limitations. For purposes of the period of limitations however, the Form 941 for a calendar year is considered filed on April 15 of the succeeding year if filed before that date. According to the IRS example on page 6 of the 941-X Instruction page, a company has until April 15th, 2024, to be able to claim the ERTC for 2020 and until April 15th, 2025, to be able to claim the ERTC for 2021.
How do I apply for the Employee Retention Credit 2021-2023?
In order to apply for the Employee Retention Credit (2022 and 2023), you must fill out a 941-X form with the correct credit amounts (both refundable and non-refundable portions), the correct qualified wages amount, and any qualifying health plan expenses. A company has up to 3 years from when their original 941 was due to claim the credit.
Companies are required to file a 941-X for the specific qualified quarter in order to claim the ERC. They must fill out specific lines in the 941-X that tell the IRS they are entitled to the refund and must show what qualifying wages and health expenses were used to claim the ERC. Generally, this is a similar approach to claiming a refund from other means.
Do you file ERC with your payroll provider or just complete the 941-x in paper form and send in? Are there pros/cons or either method?
Typically, we say that a company should have either their payroll provider or accountant complete it for you, but you can file it yourselves. While as a Consulting Firm, we can’t file the claim for you, we can assist and guide you through the submission process.
Additional Frequently Asked Questions
Is the Employee Retention Credit taxable income?
No, the refund given by the IRS is completely tax-free. Please note however, that like other tax credits, for-profit companies will need to reduce their salary and wage deductions by the credit amount in the qualified years to get this tax-free status. The benefit of the tax-free refund greatly outweighs this requirement. Non-profit companies do not need to worry about this part.
How do I report the Employee Retention Credit on 1120s?
You do not need to report the ERC as it is tax-free, however for-profit companies will need to reduce their salaries and wage deductions for the qualified year by the credit amount within 3 years of claiming the credit in order to prevent penalties from the IRS.
How will I receive my Employee Retention Credit refund?
Like any refund, the IRS will send it via a check in the mail/direct deposit. Please note that the general timeline is 3-6 months although larger and more complex claims could take an additional undisclosed amount of time.
