Are you a business owner looking to claim the Employee Retention Tax Credit (ERC)? If so, you’ve come to the right place! In this step-by-step guide, we will walk you through the process of claiming the ERC, ensuring that you understand each necessary step along the way. By the end of this article, you’ll have the knowledge and confidence to navigate the complexities of this tax credit and maximize your potential savings. So, let’s get started on this journey towards claiming the Employee Retention Tax Credit!
A Step-by-Step Guide on Claiming the Employee Retention Tax Credit
1. Eligibility Criteria for the Employee Retention Tax Credit
1.1 Determining If Your Business Qualifies
To determine whether your business qualifies for the Employee Retention Tax Credit (ERTC), you need to meet specific criteria. First and foremost, you must be an eligible employer. This means that your business must have experienced either a full or partial suspension of operations due to governmental orders related to COVID-19, or you must have undergone a significant decline in gross receipts compared to the same quarter in the previous year.
1.2 Understanding the Time Period Eligibility
The ERTC is available for wages paid between March 12, 2020, and December 31, 2021. However, the eligibility criteria vary depending on the time period. For wages paid between March 12, 2020, and December 31, 2020, your business must have experienced a significant decline in gross receipts of 50% or more compared to the same quarter in 2019. For wages paid after January 1, 2021, the threshold for significant decline in gross receipts increases to 20%.
1.3 Evaluation of Impact on Business Operations
To determine if your business experienced a partial or full suspension of operations, you need to assess the impact of governmental orders related to COVID-19. For example, if your business had to close or limit its operations due to lockdown measures, it likely qualifies for the ERTC. However, if your business continued to operate at full capacity without any restrictions, it might not meet the eligibility criteria.
1.4 Not Eligible for Double Benefits
It’s essential to note that you cannot claim the ERTC for wages that you have already used to receive other COVID-19-related benefits, such as the Paycheck Protection Program (PPP) loan forgiveness. You must carefully evaluate your eligibility for each program and ensure you do not claim double benefits.
2. Gathering the Necessary Documentation
2.1 Employee Payroll Records
One of the critical pieces of documentation you need to gather is your employee payroll records. This includes records of the wages paid to employees during the eligible time periods for the ERTC. These records should include detailed information such as the employee’s name, social security number, payment dates, hours worked (if applicable), and the wages paid.
2.2 Financial Records of Qualified Health Plan Expenses
If your business paid for qualified health plan expenses for your employees, it’s important to gather the necessary financial records. These records should include information about the health plan, premiums paid, and documentation showing that the plan is qualified under the ERTC guidelines.
2.3 Documentation of Eligible Employer Status
To claim the ERTC, you must provide documentation proving your status as an eligible employer. This can include any governmental orders or official communications that mandated the suspension of your business operations or records showing the decline in gross receipts compared to the previous year.
2.4 Supporting Documentation for Partial Suspension of Operations
If your business experienced a partial suspension of operations, you need to gather supporting documentation to validate this claim. This can include orders or guidelines from relevant government agencies imposing restrictions or limitations that directly affected your business operations.
3. Calculating the Employee Retention Tax Credit
3.1 Determining the Maximum Credit Amount
The ERTC is calculated based on the qualified wages and qualified health plan expenses paid to eligible employees. The maximum credit amount is 70% of up to $10,000 in qualified wages per employee per quarter in 2021. For wages paid in 2020, the maximum credit amount is 50% of up to $10,000 in qualified wages per employee per year.
3.2 Identifying Qualified Wages
To calculate the ERTC, you need to identify the qualified wages for each eligible employee. Qualified wages include wages paid to employees during the eligible time periods, but they may be subject to certain limitations. For example, wages paid to majority owners or their family members may not qualify for the credit.
3.3 Calculating the Qualified Health Plan Expenses
Qualified health plan expenses include the amounts you paid for providing health coverage to your employees. This can include both the employer and employee portions of premiums. To calculate the credit amount related to qualified health plan expenses, you need to gather the necessary records and determine the eligible expenses for each employee.
3.4 Understanding Aggregation Rules for Multiple Entities
If you have multiple entities or businesses under common control, it’s important to understand the aggregation rules for calculating the ERTC. Generally, you need to aggregate the wages and health plan expenses across all entities to calculate the credit properly. Consulting with a tax professional can help ensure you understand and apply the aggregation rules correctly.
4. Filing the Required Forms
4.1 Form 941, Employer’s Quarterly Federal Tax Return
To claim the ERTC, you need to file Form 941, the Employer’s Quarterly Federal Tax Return. This form is used to report the wages paid to employees, calculate various employment taxes, and claim certain credits, such as the ERTC. Ensure you accurately report the qualified wages and health plan expenses on Form 941 to claim the credit correctly.
4.2 Form 7200, Advance Payment of Employer Credits Due to COVID-19
If you need immediate financial assistance and want to claim an advance payment of the ERTC, you can file Form 7200. This form allows eligible employers to request an advance payment of the credit by reducing future tax deposits or requesting a refund. It’s important to carefully calculate and report the requested advance payment amount on Form 7200.
4.3 Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities
In certain cases, employers who are eligible for both the ERTC and the Qualified Small Business Payroll Tax Credit for Increasing Research Activities may need to file Form 8974. This form helps allocate the tax credits between these two programs correctly.
5. Claiming the Employee Retention Tax Credit on Form 941
5.1 Reporting the Qualified Wages and Health Plan Expenses on Form 941
When filing Form 941, you need to accurately report the qualified wages and health plan expenses on the designated lines. Ensure you carefully review the instructions provided by the IRS and follow the correct reporting guidelines to claim the credit.
5.2 Calculating the Employee Retention Tax Credit
Within Form 941, you will calculate the ERTC based on the information provided, including the qualified wages and health plan expenses. The instructions provided by the IRS will guide you through the calculation process to determine the credit amount accurately.
5.3 Reducing Tax Deposits or Requesting Refunds
Once you have determined the credit amount, you can reduce your federal tax deposits or request a refund if you have already made the full payment. Make sure to follow the appropriate process when reducing your tax deposits or claiming a refund to ensure compliance with IRS guidelines.
6. Requesting Advance Payment of the Employee Retention Tax Credit
6.1 Understanding the Purpose of Form 7200
Form 7200 allows eligible employers to request an advance payment of the ERTC. This can provide immediate financial relief to businesses facing economic challenges due to COVID-19. The advance payment can be requested by reducing tax deposits or by receiving a refund from the IRS.
6.2 Eligibility and Filing Requirements for Form 7200
To file Form 7200 and request an advance payment of the ERTC, you need to meet specific eligibility criteria. These criteria include experiencing a significant decline in gross receipts or a full or partial suspension of business operations. The instructions provided with Form 7200 will guide you on the filing requirements and eligibility criteria.
6.3 Calculating and Reporting the Requested Advance Payment Amount
When filing Form 7200, you need to calculate the requested advance payment amount correctly. This amount should reflect the estimated ERTC you are eligible to claim based on the qualified wages and health plan expenses. Ensure accuracy when reporting the requested advance payment on the form.
6.4 Timeline for Receiving the Advance Payment
Once you have filed Form 7200, the timeframe for receiving the advance payment may vary. The IRS strives to process these requests as quickly as possible, but it is essential to be aware of the current processing times. Staying updated on IRS communications and guidance can help you understand the timeline for receiving the advance payment.
7. Allocating the Employee Retention Tax Credit among Affiliated Entities
7.1 Determining Eligibility for Aggregation
If you have multiple entities or businesses under common control, you need to determine if they are eligible for aggregation. Generally, entities with common ownership or control may be eligible for aggregation for the purpose of calculating the ERTC. Consulting with a tax professional can help you evaluate your situation and understand the eligibility requirements for aggregation.
7.2 Calculating the Aggregated Credit Amount
When aggregating for the ERTC, you need to calculate the aggregated credit amount correctly. This involves combining the qualified wages and health plan expenses across all eligible entities. Following the IRS guidelines and seeking professional assistance can ensure accurate calculations.
7.3 Reporting the Aggregated Credit on Form 941
To properly report the aggregated credit, you need to complete the specific lines on Form 941. The instructions accompanying the form will guide you on where and how to report the aggregated credit amount accurately. Ensure you review the instructions thoroughly to avoid errors.
7.4 Ensuring Proper Documentation for Aggregation
When aggregating eligible entities, it’s crucial to maintain proper documentation to support the aggregation. This includes records of the common ownership or control, financial statements, and any other relevant documentation demonstrating the relationship between the entities. Keep these records on file to substantiate your aggregation claims.
8. Verifying and Documenting Eligibility for the Employee Retention Tax Credit
8.1 Retaining Supporting Documentation
Throughout the process of claiming the ERTC, it’s essential to retain all supporting documentation. This includes records of eligible employee wages, health plan expenses, and any other relevant documents that prove your eligibility. Keeping accurate and organized records can assist in future audits or inquiries.
8.2 Reviewing and Consulting with Tax Advisors
To ensure you are correctly claiming the ERTC, it’s advisable to review your calculations and documentation with a tax advisor. They can provide expert guidance and review your claims for accuracy and compliance. Seeking professional advice can help minimize errors and potential issues with the IRS.
8.3 Staying Updated on IRS Guidance
As with any tax-related matter, it’s crucial to stay informed about the latest IRS guidance and updates regarding the ERTC. The IRS frequently releases information, notices, and FAQs that provide clarification on various aspects of claiming the credit. Consulting IRS resources and staying updated can help you avoid potential pitfalls and ensure compliance.
9. Seeking Professional Assistance if Necessary
9.1 Engaging a Tax Professional
Navigating the complexities of claiming the ERTC can be challenging, especially for businesses without dedicated tax departments. In such cases, engaging a tax professional can provide valuable assistance. They can guide you through the process, help with calculations, and ensure compliance with IRS requirements.
9.2 Consulting with an Accountant
If you have an in-house accounting team, consulting with them can also provide valuable insights. Accountants can assist with record-keeping, financial statements, and understanding the implications of claiming the ERTC on your overall financial picture. Their expertise can help you make informed decisions and optimize your tax strategy.
10. Potential Challenges and Common Mistakes to Avoid
10.1 Identifying Common Mistakes
When claiming the ERTC, it’s essential to be aware of common mistakes that businesses make. Some of these include incorrect calculations, improper documentation, claiming double benefits, or not staying updated on the latest IRS guidance. Learning from these mistakes can help you avoid potential pitfalls and smoothly claim the credit.
10.2 Addressing Potential Challenges
Challenges in claiming the ERTC may arise due to changes in regulations, unique business circumstances, or complexities in calculations. To address these challenges, consult IRS resources, seek professional advice, and engage with tax advisors who specialize in these matters. Being proactive and diligent can help you navigate and overcome potential challenges.
10.3 Reviewing IRS Examples and FAQs
The IRS provides various examples and frequently asked questions (FAQs) to assist businesses in understanding the ERTC requirements and procedures. Reviewing these resources can provide clarity and address specific scenarios that you may encounter. Taking the time to understand the IRS examples and FAQs can help you avoid confusion and ensure accurate and compliant claim submissions.
In conclusion, claiming the Employee Retention Tax Credit requires careful evaluation of eligibility criteria, gathering necessary documentation, accurate calculation of credit amounts, and proper filing of required forms. It is advisable to consult with tax professionals, stay updated on IRS guidance, and maintain organized records to confidently claim the credit and maximize its benefits for your business.