At the end of that quarter. An eligible employer could reduce their employment tax deposits during the quarter by the expected credit amount for the quarter. However, the ERC reduces the expenses that an eligible employer could deduct from their federal income tax return (that is, employers who file an annual payroll tax return can file an amended return using Form 944-X (Employer's Adjusted Federal Tax Return or Request for Refund) or Form 943-X (Employer's Adjusted Federal Tax Return for Agricultural Employees or Request for Refund) for credits. Employers reported total qualified wages and the employee retention credit related to COVID-19 on Form 941 for the quarter in which qualified wages were paid.
The initial confusion surrounding eligibility for the employee retention credit was aggravated by subsequent legislative changes to the CARES Act, which resulted in an eligibility matrix that employers could analyze with little guidance. If the retained employment tax deposits were not enough to cover the expected credit amount, the employer could file Form 7200 (early payment of employer credits due to COVID-19) to request early payment of the remaining credit amount. The credit was allowed by deducting the employer's share of social security taxes (rate 6.2%) and railroad retirement tax on all wages and compensation paid to all employees during the quarter. Many employers don't know that employers can take advantage of both the Check Protection Program loan and the ERC.
For the purposes of the employee retention credit, a part of an employer's business is considered more than a nominal part of operations if the gross revenues of that part of business operations are not less than 10% of gross revenues (determined by the same calendar quarter of 2013) or the hours of service performed by the employee are that part of the company not less than 10% of the total number of hours of service provided by all employees of the company of the employer. The employer could withhold the federal income tax withheld from employees, employee participation in social security and Medicare taxes, and the employer's share in social security and Medicare taxes with respect to all employees. The CARES Act, which specifically recognizes tax-exempt organizations, can be considered eligible employers, unlike most federal tax credits, which are deducted from the income tax liability. So how do employers determine if they are eligible for the ERC? Through my experience working with clients, I have identified six of the most common misconceptions I hear about ERC eligibility.
The employee retention credit (ERC) is a refundable tax credit against certain payroll taxes that was originally created under the CARES Act to help companies cover the cost of keeping workers employed during the pandemic. Due to the complexity of eligibility for the employee retention credit, Thomson Reuters has updated the employee retention credit tool to help all employers discover if they qualify for the credit. The initial confusion surrounding eligibility for the employee retention credit in the CARES Act was aggravated by subsequent legislative changes.