How to claim the Employee Retention Tax Credit
Coronavirus / COVID-19 relief efforts
July is the first reporting period since many of the COVID-19 pandemic relief options have gone into effect. In response, Form 941 was updated to be able to report related new credits: the Employee Retention Tax Credit (ERTC) and expanded employee sick and family leave. This article discusses the Employee Retention credit, a few options for claiming the credit, and how it will be reported on Form 941.
What is the ERTC?
- The credit is up to 50% of qualified wages and is fully refundable.
- Limited to $10,000 of wages per employee – so the maximum credit is $5,000 per employee.
- The credit is based on wages paid from March 13 through December 31, 2020.
- Employers ARE NOT eligible if they received and used a PPP or Paycheck Protection Program loan.
- Employers ARE eligible when:
- The business did not receive and use a PPP loan.
- Business operations were fully or partially suspended due to orders from a governmental authority that limited commerce, travel or group meetings due to the novel coronavirus / COVID-19 disease. OR
- The business experienced a during the calendar quarter.
JCCS professionals have discussed ERTC and other COVID-19 relief measures for small businesses in webinars over the past few months. Recordings of these webinars can be found on our website’s Coronavirus News page. In our Seeing Beyond the PPP & EDIL recording May 8 there is an illustrated example of determining the eligibility and refundable portion of the credit at around 40:30 minutes.
Receiving the credit
To allow employers to see benefit from this credit immediately, as opposed to only receiving the credit when filing tax returns, ERTC allows employers to retain certain employment taxes (the federal income tax and both the employee/employer portions of Social Security and Medicare taxes) that otherwise would have been deposited by the employer through EFTPS, the federal online payment system.
If the credit amount is larger than the employment taxes for that period, the employer can receive the difference as a refund. Employers have two options for receiving the refund.
- Option one: wait until the end of the quarter and receive the refund after filing Form 941.
- Option two: use Form 7200 to receive advance payment of the refund amount before Form 941 is filed for the quarter.
The form is paper filed. It is unknown how quickly the IRS will be able to process these forms.
- It is possible to file more than one Form 7200 per quarter.
- The form(s) must be submitted before the end of the month following the end of the quarter that the credits are applicable to.
- No Form 7200 can be filed after filing fourth quarter Form 941 for 2020.
- Part two of this form is where amounts for ERTC and other COVID-19 credits for advance payment are calculated. For ERTC, line 1 is the total credit for the period and line 5 is the amount of payroll taxes retained already by the employer. The difference (the remaining credit amount) would be on line 8 – advance requested. Please note that this form can be used to file for advance payment of qualified sick and family leave credits at the same time. It is possible to be eligible for all the credits, but there cannot be “double dipping” of the wages. Each credit amount must be for qualifying wages not used in calculating any other credits.
The redesigned Form 941
Form 941 has been expanded to allow for reporting and reconciliation of the payroll tax credits created by the CARES Act and other federal legislation related to the coronavirus / COVID-19. This revised form will now be more than three pages long and will be used for the remaining 2020 quarterly reporting. As stated above, for ERTC employers can retain the payroll taxes reported on Form 941. There are several new payroll credits related to COVID-19 and employers may be reconciling multiple credits on this quarterly form. We believe that most payroll software programs will be able to calculate the correct liability and credit amounts for the other COVID-19 credits but will need manual calculation of the ERTC credit portion because ERTC requires calculations based on figures (the gross receipts test) that are not solely payroll amounts. Form 941 has an additional worksheet where calculations for the ERTC will be performed. Form 941 will reconcile what the tax amount would have been, how much the employer retained, and if there was any advance payment claimed on Form 7200; and determine if any additional credit is owed to the employer.
The new Form 941 will also calculate credits on qualifying wages for March 13-31, 2020, which have already been reported on the first quarter Form 941. If Form 7200 has not already been filed for advance payment, the credit for these first quarter wages will be refunded on the second quarter reports.
For some employers ERTC may provide some much-needed relief as their businesses recover. The credit is not subject to a specific time period like the PPP but may apply to wages paid through the end of the year.
For payroll tax reporting much has changed in a short amount of time and JCCS is here to help you navigate these changes. Contact us today to talk about how we can help support you and your business.
* This article is not a complete listing of all the details related to the tax topic and you should contact your CPA for a more detailed discussion regarding these items and how they may apply to your specific situation.