2021 Update: Employee Retention Tax Credit Limits Explained

Are you curious about the maximum employee retention tax credit for 2021? Look no further! In this article, we will provide a clear explanation of the updated limits for the Employee Retention Tax Credit. Whether you’re a business owner or an employee, understanding these limits can have a significant impact on your financial planning. So, let’s dive in and uncover all the essential details!

Employee Retention Tax Credit Overview

The Employee Retention Tax Credit (ERTC) is a valuable tax incentive that provides financial relief to eligible employers who have been adversely affected by the COVID-19 pandemic. Designed to encourage employers to keep their employees on payroll, the ERTC aims to provide support and help retain a stable workforce during these challenging times.

What is the employee retention tax credit?

The employee retention tax credit is a tax incentive provided by the Internal Revenue Service (IRS) to eligible employers. It allows them to claim a credit against certain employment taxes based on qualified wages paid to their employees. This credit is available to businesses that were either fully or partially suspended due to a government order or experienced a significant decline in gross receipts.

Purpose of the tax credit

The primary purpose of the employee retention tax credit is to assist eligible employers in retaining their employees and avoiding layoffs or furloughs. By providing financial relief, the credit aims to help businesses recover from the economic impact of the COVID-19 pandemic and maintain a stable workforce. By keeping employees on payroll, businesses can be better positioned to resume normal operations once the pandemic subsides.

Eligibility Criteria for the Employee Retention Tax Credit

To determine if you are eligible for the employee retention tax credit, you need to consider two key aspects: qualifying employers and qualifying employees.

Qualifying employers

To be eligible for the employee retention tax credit, you must be an employer engaged in a trade or business during the relevant calendar quarter. Furthermore, you must fall into one of the following categories:

• Your business operations were fully or partially suspended due to a government order.
• Your gross receipts for a calendar quarter were less than 50% of the comparable quarter’s gross receipts in 2019. Once your gross receipts exceed 80% of the comparable quarter’s gross receipts in 2019, you are no longer eligible starting from the following quarter.

Qualifying employees

To claim the employee retention tax credit, you must have employees who are considered “qualified employees.” These include individuals who meet one of the following criteria:

• Full-time or part-time employees.
• Employees who are not actively providing services due to a government order or a significant decline in the employer’s gross receipts.

Exceptions for governmental entities and tax-exempt organizations

It is important to note that governmental entities and tax-exempt organizations are subject to different eligibility requirements. Governmental entities are generally not eligible for the employee retention tax credit. However, tax-exempt organizations may be eligible if they meet the criteria outlined by the IRS.

Calculating the Employee Retention Tax Credit

Calculating the employee retention tax credit involves several factors, including the maximum credit per employee, the wages considered for the credit, and how to determine the number of full-time employees.

Maximum credit per employee

The maximum credit per employee for the employee retention tax credit is $7,000 per quarter for wages paid between January 1, 2021, and December 31, 2021. This means that if you have multiple eligible employees, you can potentially claim up to $7,000 per employee, per quarter.

Wages considered for the credit

The wages considered for the employee retention tax credit vary depending on the employer’s average full-time employee count. For employers with more than 100 average full-time employees, only wages paid to employees who are not providing services due to a government order or a significant decline in gross receipts are eligible for the credit. For employers with 100 or fewer average full-time employees, all wages paid during the relevant period can be considered for the credit.

Determining the number of full-time employees

To determine the number of full-time employees for calculating the employee retention tax credit, you need to consider the average number of full-time employees employed during 2019. This includes both full-time and full-time equivalent employees and is calculated separately for each calendar quarter.

Calculating the credit for part-time employees

If you have part-time employees, the credit for their wages is determined based on a proportional calculation. This means that the credit for part-time employees is determined by multiplying their eligible wages by the percentage of their average hours worked compared to a full-time employee’s average hours.

Employee Retention Tax Credit 2021 Updates

The employee retention tax credit has undergone important updates for the 2021 tax year. These updates include an extension of the tax credit, an increase in the credit percentage, and changes to the maximum credit per employee.

Extension of the tax credit

The employee retention tax credit has been extended until December 31, 2021. This means that eligible employers can continue to claim the credit for qualified wages paid during this extended period.

Increase in credit percentage

Starting from January 1, 2021, the credit percentage for the employee retention tax credit has increased to 70% of qualified wages. This is a significant increase from the previous 50% credit percentage.

Maximum credit per employee for 2021 tax year

For the 2021 tax year, the maximum credit per employee for the employee retention tax credit is $7,000 per quarter. This means that eligible employers can potentially claim a maximum credit of $28,000 per eligible employee for the entire year.

Claiming the Employee Retention Tax Credit

To claim the employee retention tax credit, eligible employers must follow specific procedures outlined by the IRS. These procedures involve reporting the credit on Form 941, claiming the credit for prior quarters, and understanding refundable tax credits.

Reporting the credit on Form 941

The employee retention tax credit is reported on Form 941, which is the employer’s quarterly tax return. Eligible employers can use this form to report their total qualified wages and the corresponding credit amount for each quarter.

Claiming the credit for prior quarters

If you were unable to claim the employee retention tax credit for prior quarters but are now eligible, you can file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to claim the credit retrospectively. This allows eligible employers to recover missed credits from earlier quarters.

Claiming refundable tax credits

The employee retention tax credit is a refundable tax credit, which means that if the amount of the credit exceeds the employer’s total liability for all employment taxes, the excess can be refunded to the employer. This provides a valuable financial benefit that can help offset business expenses or be reinvested in the workforce.

Interaction with other COVID-19 relief programs

The employee retention tax credit may interact with other COVID-19 relief programs, such as the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program. Understanding these interactions is crucial for maximizing the benefits available to your business.

Interaction with Paycheck Protection Program

Eligible employers who receive a PPP loan can still claim the employee retention tax credit. However, the same wages used to determine loan forgiveness under the PPP cannot be used for the tax credit calculations. This means that wages used for PPP loan forgiveness cannot be double-counted for the employee retention tax credit.

Interaction with Economic Injury Disaster Loan program

Similarly, wages used to determine loan forgiveness under the Economic Injury Disaster Loan (EIDL) program cannot be used for calculating the employee retention tax credit. As with the PPP, it is important to ensure that wages are not double-counted for both loan forgiveness and tax credit purposes.

Documentation and Record-Keeping Requirements

To support your claim for the employee retention tax credit, it is essential to maintain proper documentation and records. This helps ensure compliance with IRS regulations and provides evidence in the event of an audit.

Documentation to support the credit

You should keep records that support your eligibility for the employee retention tax credit. This includes documentation related to the suspension of business operations, government orders, or significant decline in gross receipts. Additionally, you should keep records of qualified wages paid to employees, employee counts, and any other relevant documentation required by the IRS.

Retaining records for the audit

It is recommended to retain these records for at least four years from the date the tax becomes due or is paid, whichever is later. By maintaining organized and accurate records, you can effectively demonstrate your eligibility for the credit and ensure a smooth audit process if required.

Penalties for Fraudulent Claims

While the employee retention tax credit provides valuable financial relief, it is crucial to understand that fraudulent claims can have serious consequences. The IRS has strict penalties in place to deter fraudulent behavior and ensure the proper use of tax incentives.

Consequences for fraudulent claims

If the IRS determines that an employer has intentionally made a fraudulent claim for the employee retention tax credit, they may be subject to penalties, fines, and potential criminal charges. These consequences can have long-lasting impacts on both the business and individuals involved.

False statements and penalties

False statements made in connection with the employee retention tax credit can result in penalties under the penalty provision of Section 7206 of the Internal Revenue Code. These penalties can vary depending on the severity of the false statements and may include fines, imprisonment, or both.

Expert Advice and Guidance

Navigating the intricacies of the employee retention tax credit can be complex and overwhelming. Seeking guidance from a tax professional can provide valuable insights and ensure compliance with IRS regulations.

Consultation with a tax professional

Consulting with a tax professional who specializes in tax incentives and relief programs can help you maximize the benefits of the employee retention tax credit. They can provide personalized advice, guidance, and assistance in navigating the complex regulations surrounding the credit.

IRS resources for the Employee Retention Tax Credit

The IRS offers a range of resources to help employers understand and claim the employee retention tax credit. This includes publications, forms, and frequently asked questions available on the IRS website. Utilizing these resources can aid in accurately calculating the credit and ensuring compliance with IRS guidelines.

Conclusion

The employee retention tax credit is a valuable tax incentive that provides financial relief to eligible employers who have been adversely affected by the COVID-19 pandemic. By understanding the eligibility criteria, calculating the credit accurately, and following the proper procedures, you can maximize the benefits of this credit. Remember to consult with a tax professional and utilize IRS resources to ensure compliance and take full advantage of the employee retention tax credit.