The ERTC is a refundable credit that businesses can claim for qualified wages, including certain health insurance costs, paid to employees. The employee retention credit is a relief measure of the CARES Act for businesses. It is a fully refundable tax credit that eligible employers who can keep employees on the payroll can claim. Credits represent 70% of eligible wages and associated expenses of the qualified health plan paid to employees.
The IRS has security barriers in place to prevent salary increases that would count toward the credit once the employer is eligible for the employee retention credit. Due to the complexities of eligibility for the employee retention credit, Thomson Reuters has updated the Employee Retention Credit Tool to help all employers discover their eligibility for the credit. Again, you can take both the employee retention credit and the paid leave credit, but you can't claim both credits for the same salary. Once you have determined your eligibility and calculated the appropriate percentage of qualifying wages for your situation, you can claim the Employee Withholding Credit by filing a quarterly adjusted payroll tax return (Form 941-X) for the quarters in which you are eligible.
Read on to learn the ins and outs of the ERC, including how the employee retention credit works and how it can help you recover from the COVID-19 pandemic. You'll need to reduce the amount of your deductible salary on your income tax return by the amount of your ERC tax credit. An eligible employer could reduce their employment tax deposits during the quarter by the amount of credit anticipated for the quarter. Depending on your business, you can also apply for the credit on Form 944, Employer's Annual Federal Tax Return, or Form 943, Employer's Annual Federal Tax Return for Agricultural Employees.
You can claim your credit by deducting it from any amount withheld, including federal income taxes, employee FICA taxes, and your share of FICA taxes for all employees up to the amount of the credit. Learn more about this tax credit option by exploring the Q&As Employee Retention Credit below. If you qualify as a small employer (500 or fewer full-time employees in 201), you can request early payment of the credit using Form 7200, Advance on Employer Credits Due to COVID-19. Employers who file an annual payroll tax return can file an amended return using Form 944-X (Adjusted Employer Annual). Federal Tax Return or Request for Refund) or Form 943-X (Employer's Annual Adjusted Federal Tax Return for Agricultural Employees or Request for Reimbursement) to claim the credits.
The retroactive termination of the Employee Retention Credit caused a lot of confusion and concern about penalties for both business owners and accountants. COVID-19 tax credits help employers pay for coronavirus-related paid sick and family leave under the FFCRA.