How to file your Employee Retention Credit in 2023
Tue | February 2023
In the United States, business owners affected by COVID-19 can claim Employee Retention Credit (ERC), a 2020 government initiative under the CARES Act encouraging companies to keep employees on their payroll.
If your business was affected, you might have until 2024 and some of 2025 to assess your payroll and claim any outstanding tax credit. Companies are to focus on the salaries paid after March 12, 2020, till the end of the ERC program in 2021 to determine eligibility.
Some businesses can claim ERC for the wages paid until September 30, 2021, and others until December 31, 2021. In the following sections, we will explain Employee Retention Credit, who qualifies for it, how it works, and how you can file ERC in 2023.
What is the Employee Retention Credit?
The Employee Retention Credit was created to help businesses keep their staff on the payroll during the COVID-19 pandemic. It is a non-refundable tax credit given to cushion some employment taxes.
Businesses that are eligible get up to 50% of the salary paid to their employees after March 12, 2020, and before January 1, 2021. Companies who qualify for the ERC can immediately access the credit by reducing the employment tax deposits they pay.
Any employer whose employment tax deposits are insufficient to cover the credit can get an advance payment from the IRS. Employers can get up to $10,000 annually per employee; the ERC extends to health insurance costs paid to employees.
Who qualifies for Employee Retention Credit?
Every employer, including those who are tax-exempt, can get an Employee Retention Credit if they had an ongoing business in 2020 and experienced:
A full or partial suspension of their business during any calendar quarter because of government orders that hindered trade, travel, or group meetings as a result of COVID-19.
A massive reduction in their gross receipts.
According to the IRS, the substantial decline in gross receipts must have started on the first day of the first calendar quarter of 2020. Also, the gross receipts must be less than 50% of the gross receipts the employer had at the same time in 2019.
How does the Employee Retention Credit work?
To get ERC after confirming your eligibility, you have to:
Pass the gross revenue or suspended operations test
You must pass either the gross revenue test or the suspended operations test. For the gross revenue test, you must show an income reduction of 50% in any quarter in 2020 and 20% in 2021. The percentage must be lower than what you earned in the same quarter in 2019.
So, assuming you made $10,000 in the first quarter of 2019. If you made 50% less in 2020, that is $5,000; you can claim ERC. You can use the suspended operations test if your gross revenue does not meet the 50% or 20% benchmark.
For the suspended operations test, you must show that a government order made you fully or partially close your business. The affected part of your company must be the nominal portion and 10% of your total receipts or service hours worked. Also, you must show that the government order was in response to COVID-19.
Calculate your qualified wages.
The next step is to calculate your qualified wages. To do this, determine the number of eligible employees you have and the total amount of qualifying salaries paid to them during the relevant quarter.
For 2020, the credit amount is generally equal to 50% of qualified wages paid to eligible employees during the eligible period, up to a maximum of $10,000 per employee per calendar quarter. So, the maximum credit per employee is $5,000 per calendar quarter.
For 2021, the credit equals 70% of qualified wages paid to each employee, up to a maximum of $10,000 in qualified wages per employee for all calendar quarters. This means the maximum credit you can receive for each employee is $7,000 per quarter ($10,000 x 70%).
Modify your payroll tax return
Finally, you can file a claim with the IRA after calculating your ERC. But first, modify your payroll tax return for each qualifying quarter and file it using Form 941-X. With your Employee Retention Credit amount, you can reduce your deductible wages on your income tax return.
How do I claim Employee Retention Credit?
The process begins with filing a claim with IRS. You must provide the IRS with information about your company and employees. You also have to submit documents supporting your claim to have been impacted by the COVID-19 pandemic.
Once you've submitted the relevant forms and supporting documents, the IRS will review your application to determine your eligibility for ERC. If you qualify, the credit goes to your future payroll taxes. The money given as credit helps businesses that are struggling to keep their staff do so.
When applying for ERC, you need the following forms:
Forms 941/941-X – Employer's Quarterly Federal Tax Return. For Instructions for Form 941, visit the IRS website.
Forms 7200 – Advance Payment of Employer Credits Due to COVID-19.
Form 8655 – Reporting Agent Authorization.
Paycheck Protection Program (PPP) Applications and Forgiveness, as applicable.
Q1, Q2, Q3, Q4 2019 Financials.
Q1, Q2, Q3, Q4 2020 Financials.
Q1 2021 Financials.
Power of attorney, if applicable.
What is the ERC expiration date?
The ERC program ended on September 30, 2021, but businesses can claim retroactively. However, companies have till April 15, 2024, to file amended returns for quarters one, two, and three of 2020 and till April 15, 2025, to file amended returns for all the quarters of 2021.
Takeaway
Although the Employee Retention Credit has ended, you can retroactively claim credits from the IRS. If you still have problems paying your employees, the money will serve as a cushion and help you keep them. However, ensure you correctly calculate the qualified wages and employees and file with the proper documents.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.