As a result, many companies that reduced their fourth quarter labor taxes to the IRS in anticipation of applying for the ERTC now owe money to the government. The employee retention tax credit (ERTC), another part of the CARES Act, was designed to encourage companies to keep employees on their payroll during the COVID-19 pandemic. Wages and compensation subject to FICA taxes and qualified health expenses will generally qualify for the ERTC. It's important to note that the ERTC is subject to income tax because the employer's aggregated wage deductions are reduced by the amount of the credit.
To receive the ERTC, companies must monetize the credit for each payroll period by filing a quarterly payroll tax return using Form 941. Employers can apply for the ERTC when filing quarterly taxes using Form 941. Employer's quarterly federal tax return for the applicable periods. The ERTC is available to almost all private sector employers who lost significant businesses or had to completely or partially suspend operations due to restrictions imposed by the COVID-19 pandemic. The ERTC is a payroll tax credit (not an income tax credit) and will ultimately be reported on Form 941. Learn more about the employee retention tax credit and hear the story and perspective of an organization that has used and benefited from the ERTC in this episode of The Wrap podcast. Despite the benefits to their company, the National Federation of Independent Business (NFIB) found that only 4% of small business owners are familiar with the ERTC program.
Business tax filers will need additional payroll data and other documents to file their quarterly returns with the ERTC. Any eligible salary that is considered in determining the allowable ERTC will not be counted as a salary for the purposes of several other tax credits and the forgiveness of PPP loans. The early termination of the ERTC means that companies must pay withheld payroll taxes to monetize their early credit, Marvin A. The new guidance explains that the choice is made simply by not claiming the ERTC for those specific salaries in the corresponding 941 return.
The employee retention tax credit (ERTC) was created by the CARES Act and was designed to encourage eligible employers to keep employees on the payroll, rather than firing them, during the COVID-19 pandemic.