Accounting for the COVID-19 Employee Retention Credit Limit on Your Federal Income Tax Return – Tax


United States: Accounting for the COVID-19 employee retention credit limit on your federal tax return

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As we enter another tax season, Americans from coast to coast will once again have to navigate a complex and ever-changing web of COVID-19-related laws on their federal tax returns. A significant change that particularly affects employers and their accountants is the recent limitation of the employee retention tax credit (“the credit”). The credit became available in the 2020 tax year to businesses, including tax-exempt organizations, that experienced some sort of closure (for employers with an average of more than 100 employees in 2019) or significant losses in gross revenue due to COVID-19 (for employers with an average of less than 100 employees in 2019).

Subject to other tax provisions for COVID relief, eligible employers could recover their tax on certain employment taxes up to 50% of qualified wages and health care costs they paid to their employees, up to at $10,000 per employee, from March 12, 2020 to December 21, 2020. These employers may also receive advance credit payments or retain amounts otherwise owed in taxes in anticipation of the credit. The Infrastructure Investment and Jobs Act, signed into law by President Biden on November 15, 2021, limits the credit for all employers (except takeover start-ups) to wages paid before October 1. 2021. In effect, this means that the credit does not apply to wages paid in the fourth quarter of the 2021 tax year. Affected employers who received credit advance payments for the fourth quarter of 2021 must repay these amounts accordingly.

In addition, employers who reduced their employment tax filings in anticipation of the credit will need to report the amounts they withheld in advance and report the fourth quarter difference on their federal tax returns. To end with a tip on best practices, remember to document every decision throughout the year that could affect any federal income tax return you prepare or file. It is far better to provide the IRS with too much information than too little.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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