Businesses that lost money due to the COVID-19 pandemic and resulting government shutdowns may be eligible for tax relief through Employee Retention Tax Credits.
The Infrastructure Investment and Jobs Act ended these tax credits in November 2021. However, businesses can still claim the credit on 2021 tax returns and file an amended return for 2020. Here is what affected companies need to know about filing.
What Is the Employee Retention Credit?
Congress created the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act to entice employers to avoid layoffs during the coronavirus pandemic in 2020.
Initially, the employee retention tax credit was worth 50% of qualified employee wages, limited to $10,000 for any one employee. The maximum credit was $5,000 for wages paid from March 13, 2020, to December 31, 2021.
For the first three quarters of 2021, the credit increased to 70% of qualified employee wages up to $10,000 per quarter for any one employee. Wages paid after September 30, 2021 aren’t eligible for the credit.
The credit is available to all eligible employers of any size who paid qualified wages to their employees. Different rules apply to employers with under 100 employees and 500 employees for certain portions of 2020 and 2021.
Businesses that qualify for and claim the credit will need to reduce the total wages reported for the tax year on their income tax return.
Some businesses that weren’t eligible to claim the Employee Retention Credit in 2020 may be eligible now and can claim the credit retroactively. Employers who took Paycheck Protection Program loans should determine if they are now eligible for the Employee Retention Credit for 2020 and 2021.
How To Claim Employee Retention Tax Credits
These are the IRS forms a business must file to claim Employee Retention Credits.
Form 941: Employer’s Quarterly Federal Tax Return
Businesses use Form 941 to report total qualified wages and the Employee Retention Credit for the quarter the qualified wages were paid. Depending on the business, you might also claim the credit on Form 944, Employer’s Annual Federal Tax Return.
Form 7200: Advance Payment of Employer Credits Due to COVID-19
For businesses whose federal employment taxes don’t cover payments, they can use Form 7200, Advance Payment of Employer Credits Due to COVID-19, to file for an advance of the Employee Retention Credits. Businesses can file Form 7200 during the month following the quarter in which qualified wages were paid. Advance payments must be accounted for when filing Form 941, 944, or 943.
According to the IRS, to request an advance payment request for the Employee Retention Credit, Form 7200 can be filed through August 2, 2021. The only exception is new businesses formed after December 31, 2020. These businesses cannot apply for an advance payment of the Employee Retention Credit.
Form 944-X: Adjusted Employer’s Annual Federal Tax Return or Claim for Refund
Businesses can file an amended return for each quarter for which the credit can be claimed if they did not claim the 2020 or 2021 credit on a quarterly return. Businesses that file an annual tax return can use Form 944-X to file an amended return or Form 943-X (for Agricultural Employees) to claim the credits.
Employee Retention Tax Credit Compliance
Businesses need to make sure they are compliant with the changing IRS rules when claiming the Employee Retention Credit. All forms must be filled out accurately based on the IRS rules governing the tax credit during the time in which qualified wages were paid. The best way to do that is to work with a tax professional who can ensure a claim is compliant with the IRS.