Employee Retention Tax Credit (ETRC) is credit against certain employment taxes. This credit was limited to 50% of qualified wages under the previously passed CARES Act, with maximum wages being $10,000 per employee per year. However, the most recently passed COVID-19 Relief Bill has extended this credit till July 1, 2021, compared to CARES Act with a deadline of December 31, 2020. The article below is going to go through the ETRC available under the New Bill.
For wages paid between Jan. 1, 2021 to July 1, 2021 the credit is increased to 70% of qualified wages with the maximum wages being $10,000 per employee per quarter. The Act increases eligibility by reducing the required gross receipt decline from 50% to 20% and provides safe harbor allowing employers to use prior quarter receipts to determine eligibility.
In order to claim ERTC, eligible employers will report their qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers. The credit is taken against the employer’s share of social security tax, but the excess is refundable.
Per IRS website, in anticipation of claiming credit employers can retain a corresponding amount of employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees share of social security and Medicare taxes and the employer’s share of social security and Medicare taxes for all employee, up to the amount of credit, without penalty taking into account any reduction for deposits in anticipation of the paid sick and family leave credit.
A significant change made under the Cost Appropriation Act, 2021 retrospectively is that businesses that availed PPP loans can also apply for ERTC. Eligibility and other requirements are as per the CARES ACT. Therefore, for quarters 2,3 and 4 of tax year 2020, the maximum ERTC is $5,000 per employee. The important point to note is that wages paid using forgiven PPP loans cannot be used for claiming ERTC.
If the credit is not claimed on an already filed Form 941, you may file Form 941-X (amendment to Form 941). The same wages used to calculate the ERTC can’t be used to calculate other credits such as the Work Opportunity Tax Credit, Employer Paid Family and Medical Leave Credit (IRC 45S), or other disaster retention credits. Employers have three years from the date when the original return was filed, or two years from the date when the taxes were paid to file an IRS Form 941-X amendment.
There is no change in the payment of deferred employer’s share of social security. Employers who opted for deferral of social security taxes in 2020 are required to make payments as 50% by December 2021 and remaining 50% by December 2022. No deferral of social security tax is available in 2021.
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