Myths Surrounding The 2021 Employee Retention Tax Credit

The Employee Retention Tax Credit is a complex legislation, passed in 1981 to encourage businesses to retain their employees after a certain period of time and pay them a portion of their regular wages or salaries as well as a certain amount of overtime pay, depending on the type of employee. The employees must have worked at least 24 hours per week for three consecutive months before the end of the calendar year in which the payroll taxes are assessed, and must have worked continuously at least 37 hours per week for a number of months during the calendar year (also known as “quantity work hours”). The total amount of payroll taxes and overtime pay can be as much as $3,600, plus taxes on the wages paid above the amount of $3,600.

Given that the employees must be paid regularly during the year to qualify for the ETC, many businesses hire additional employees during the period, and do not wish to hire additional employees to fill the normal position to fill the positions vacated by departing employees. Therefore, these additional employees cannot be paid by the employer in the normal course of employment, but must be paid from the ETC, by the payroll tax payer.

ERC and ETC Payments from 2017-2021

The law allows some exceptions. First, ETC payments cannot be made to employees who are not receiving an “equivalent form of compensation” from their current employer, which is defined as receiving an “equivalent salary,”. Employers that have employees who are performing regular duties for which no similar compensation could be offered, but have not met the “quantity work hours” requirement of the ETC, are not required to pay any ETC until a minimum number of hours have been worked. If this minimum number of hours is reached, then the ETC will apply for a full year (2017 – 2021).

In addition, an employer that has a retiree who is receiving a pension or annuity from the employer, is not required to pay the ETC if the retiree is still working for the employer and is receiving “an equivalent form of compensation.” However, if the retiree is working for an employer who no longer is paying the employee any type of compensation, then the ETC will apply for a full year. Since the ETC is a rebate of the employees’ payroll taxes and overtime pay, the ETC is often referred to as an “after-tax” benefit or “post-tax” benefit. The way the ETC works is, for every $1,000 of payroll taxes and wages, the employee will receive $110 in a check at the end of the calendar year.

Many employers (and employees) use the following method of “bending down” the ETC: The first $3,600 of wages paid to an employee must be taxed, while the next $2,700 in wages must be reduced by the ETC. The employee’s actual compensation (that is, their weekly salary minus the ETC) will then be $3,600. Some may argue that since the ETC is not “present money” and is simply a refund of the payroll taxes and overtime pay, and not a salary, it doesn’t “bend down” to make this “bend” for the employer to be able to pay an employee a monthly salary. However, with the amount of regular overtime hours worked being at least $3,600, and the employee working 37 hours per week (a “bonus work hour”), it is “bend” down to $4,400, in order for the employer to be able to pay an employee a weekly salary of $2,700.

Myths About The 2021 Employee Retention Tax Credit

Some people believe that the payroll taxes in Arkansas are fixed at $0.10 per $100 of wages, which means that the amount of payroll taxes collected is $10,000 per employee, each year. The truth is that there are actually four taxes that employers pay, as described above, but only two of the four taxes are equal to each other.

• The first is the employer’s “employee wages tax.” This tax is what most people believe that they are paying.
• The second is the employee’s “employer contributions” to Social Security. This tax is also what most people believe they are paying.
• The third is the FICA taxes. This tax is what is sometimes referred to as the “employee withholding tax,” since it is how the employer makes the contribution.
• The fourth tax is referred to as the “employee benefits tax.” This tax is what is referred to as “the ETC,” because it is paid to employees who worked less than 365 days per year, with no eligibility for Social Security. In other words, it’s a tax that’s paid to a taxpayer, who was actually working, but not receiving a salary.

For instance, an employee with a salaried position who worked one year, 790 days, would pay a total of $15,750 in payroll taxes to the state of Arkansas. The state of Arkansas collects $10,000 of payroll taxes from the employer, and will rebate the employer $15,750 of those taxes, by the end of the calendar year. So, in effect, the state of Arkansas reimburses the employer for $10,000 in taxes. The reality is that the state of Arkansas collects payroll taxes for employees, each year, but it rebates them to the employer, each year, if an employee worked less than a year.

However, because the state of Arkansas was able to accurately calculate the payroll taxes from all of the state and local employment taxes that the employee paid, from day one of the employee’s employment, to the end of the year, each year, it is possible to calculate the amount of payroll taxes that the employer will save each year, with the ETC. (Of course, the ETC isn’t actually a “payroll tax,” since it is simply a refund of a portion of the state and local employment taxes.)

However, there are a lot of myths about Employee Retention Tax Credit. Some of them are described as below:

1. The tax credit is the same for all employees, as described in Section 1-12-116© of the Code.

This is not true. As discussed above, the FICA and the state and local taxes that the employee paid, as well as any Social Security taxes that were paid, are all factored into the amount of the refund that the employer is issued. In other words, if you are a salaried employee, you will be subject to the FICA taxes, unless you are married filing jointly, in which case you would only be subject to FICA taxes, on your first $113,700 of earnings.

However, the amount of FICA taxes paid will not be factored into the amount of the refund that the employer receives for that employee. For instance, an employee who is in the top “1%” of tax brackets, would receive a tax refund of $5,000 on his or her FICA taxes. If you are in the lower 50% tax bracket, you would get $0.50 for each $1 of FICA taxes paid.

• The tax credit will be $0.70 per $100 of payroll for a salaried employee, if you file as “head of household.”

This is also not true. The law is actually much more complicated than it may seem. See the Federal “Head of Household” or “Joint Head of Household” tax tables, found in Publication 3-Sha 2017, and elsewhere. Although the amount of the credit is not specified by a specific dollar amount, the amount is, at most, $0.20 per $100 of payroll for salaried employees, and less than $0.30 per $100 of payroll for non-salaried employees, when filing as “head of household.”

For instance, if the employee is in the lowest tax bracket, they would have to be in the 20% tax bracket in order to have an ETC of $0.70 per $100 of payroll. ERC As are not based on a specific formula, like the FICA tax tables, and are instead calculated by the amount of FICA taxes paid and the amount of Social Security taxes paid, which are then added together and then multiplied by a multiplier. In short, the credit is not the same amount for each individual, and it is impossible to calculate the amount of credit that will be issued to any individual, because it depends on the exact amount of the employee’s FICA and state and local taxes that are covered.

• In order to qualify for the ETC, you must have been in the same residence as your spouse, children, parents, and other relatives for the entire tax year.

In most situations, this is correct. However, under certain circumstances, the ETC, if the child or parent were a non-resident alien, might not be available. That means that, depending on your circumstances, you may be able to claim the ETC even if your family lived overseas for a substantial portion of the year. A good example would be a person who worked for a foreign company with an office located in another country, and whose children were enrolled in a foreign school.

If the person worked full-time (40 hours a week) and worked overseas for 11 months of the year, and his or her children were enrolled at the foreign school for 10 months of that year, and the individual was not eligible for the ETC because he or she was not living in the United States for the full year, the individual would be able to claim the ETC only for the period he or she was in the United States during the tax year. If the person worked full-time (40 hours a week) and worked overseas for a shorter period, or was living in the United States for part of the year, and then went abroad for another 11 months for business purposes, the ETC would not be available to the individual.

In the context of the ETC, it is important to remember that an individual who is not living in the United States must be in the United States in order to qualify for the ETC. In other words, if you live in Paris, France and would like to claim the ETC, but you work in Boston, Massachusetts and you spend only two months in Paris during the tax year, then you would not qualify for the ETC. In this case, you would not be able to claim the ETC.

• ERC are not refundable, and therefore should not be claimed by individuals with low incomes.

This is not true. The ERC, unlike regular tax credits, are fully refundable. The ETC is not. ERCs can be claimed by individuals who have a household income of less than $50,000, but cannot be claimed by individuals with a household income of $100,000 or more.

In a situation where you have a low income, such as a single parent with three children living on less than $30,000 a year, or a retired individual living on a limited income, the ETC can provide an important income boost. While ERC cannot be claimed by individuals with a household income of $100,000 or more, the ETC can be claimed by all taxpayers with an adjusted gross income (AGI) less than $100,000.

On a household income of $100,000 or more, taxpayers are not eligible for the ETC because they are not low income. In most situations, an individual’s ETC is reduced by 20% of his or her refundable adjusted gross income (AGI) for the calendar year, so an individual whose total tax liability for the year is $60,000 would receive a $3,800 ETC, but a person whose total tax liability is $130,000 would only receive a $3,000 ETC.

• For purposes of the ETC, one person living abroad is a household. For purposes of the ETC, a family in a foreign country with a member who is a US citizen is not a household.

Technically, a “domestic member” of a household is anyone who is a US citizen or lawfully admitted permanent resident of the United States, is in the same household, and who is at least 16 years old. Since a member of the household is defined as a family member in certain situations, such as when a child lives at home while attending college or living abroad, a married couple with no children at home, and a sole breadwinner who has not worked abroad for at least two years are considered a single “domestic member.”

Under this definition, a single individual who is resident abroad, including a foreign-born citizen who resides abroad because of his or her job, would also be considered a member of the household. In the case of the ETC, a foreign-born US citizen who resides abroad for a large portion of the year is considered a member of the household, because of his or her status as a “domestic member.” Therefore, in the ETC, a foreign-born US citizen who resides abroad is considered a household member.

Therefore, a family consisting of a married couple who has three children who are US citizens or have been issued a green card by the US government, is considered a household because it has two of these three children living at home with the family at all times.

Under this definition, if one of the children in this family who is a US citizen is on vacation in another country for at least ten weeks during the tax year, then he or she is considered a “domestic member” of the household and his or her tax liability would be lower than if he or she were a “domestic member.” If the family were a single “domestic member,” the taxable income of the “domestic member” would be lower.

• If an individual claims the ERC, but does not owe enough income tax to claim the ERC, then he or she will not have to pay any income tax on that amount.

If an individual claims the ERC and his or her adjusted gross income (AGI) for the calendar year is less than the threshold amount set out in paragraph (a) of the EIC, then the individual will not owe income tax on the ERC. For purposes of the EIC, the threshold amount for income tax liability is $53,505.

his amount includes the $3,800 ETC, the $1,200 ETC for the EIC, and the additional $3,000 required in order to claim the EIC. If an individual claims the ETC and his or her AGI for the calendar year is at least $100,000, then he or she must pay income tax on the full amount of the EIC (the $3,800 ETC and the $1,200 EIC).

• If an individual claims the ERC, and he or she has any taxes that he or she owes, then that person will be “qualified for an offset” under paragraph (b)(1) of the ERC.

If an individual has any taxes that he or she owes, but who has claimed the EIC, that person can have those taxes offset against his or her ERC for the following reasons:

• If the individual has filed tax returns for prior calendar years for which he or she was required to pay taxes.
• If the individual had an exemption available to him or her, but has claimed the EIC on a return in this tax year.
• If the individual is over age 65, has claimed the EIC, and has income that exceeds certain levels.
• If the individual has received social security income in the tax year and has claimed the EIC, then he or she will have income tax paid on that income.
• If the individual has received a refund from the IRS, and has claimed the EIC.
• If the individual was eligible for the earned income tax credit, but has claimed the EIC.
• If the individual is blind or otherwise disabled, has claimed the EIC, and is required to pay tax on any amount that would otherwise be considered a refund.
• An individual is exempt from paying income tax on certain payments that he or she receives from family members in certain situations.

A payment is considered “taxable income” only if it is taxable to the person receiving the payment. An individual who has no income and receives payment for services is considered to have received income. However, that payment is considered not taxable to the individual, as it is considered to have been made in exchange for services. If the individual is claiming the EIC, then he or she will not owe any income tax on the amount of the payment.

• If an individual with no income has received payment from his or her spouse for the payment of maintenance or support, then the payment is considered to have been made in exchange for services. However, that payment is considered to have been made for the care and support of a dependent and will be taxed as income to the individual receiving the payment.
• If an individual is under age 65 and receives a payment from his or her spouse or parent that is made under age 65 for their support, then the payment is considered to have been made in exchange for the support of the individual. However, the payment is still considered not to have been made in exchange for services.
• If an individual receives a payment from a family member in another country, then that payment is considered to have been made in exchange for the support of the individual. However, the payment is still considered to have been made for the care and support of the individual.
• If an individual receives a payment for services, but is required to pay income tax on the income that is received, then the payment is considered not to have been made in exchange for services.
• If an individual receives a payment for a service, but is not required to pay income tax on that income, then the payment is considered to have been made for the care and support of the individual.
• An Employee Retention Tax Credit is a refundable tax credit that can be applied to an individual’s tax liability based on earnings, wages, or other taxable income of an individual’s current or former employees.

The credit amounts are provided in the Internal Revenue Code and, except for the dollar amount of the credit, are adjusted annually for inflation. ERC provides an offset for the employee share of Social Security and Medicare taxes that employers must pay for each employee they employ for more than nine months, and is credited against the taxpayer’s federal income tax liability on the first $130 of employee tax. ERC does not provide a offset for Social Security or Medicare taxes that a person or their spouse must pay for a dependent.

1. An Employee Retention Tax Credit is a refundable tax credit that can be applied to an individual’s tax liability based on earnings, wages, or other taxable income of an individual’s current or former employees.

The credit amounts are provided in the Internal Revenue Code and, except for the dollar amount of the credit, are adjusted annually for inflation. ERC provides an offset for the employee share of Social Security and Medicare taxes that employers must pay for each employee they employ for more than nine months, and is credited against the taxpayer’s federal income tax liability on the first $130 of employee tax. ERC does not provide a offset for Social Security or Medicare taxes that a person or their spouse must pay for a dependent.

1. ERC is not required to be used as a credit for taxable wages, but the credit can be used as a credit against the employer’s FICA taxes for each employee’s FICA taxes payable for the employee. However, in order to receive ERC as a credit for wages, the wages must meet the following criteria:
   1. The wages must be paid to an individual who, while acting in the course of business for the employer, was engaged in full-time employment with the employer for at least one full calendar quarter prior to the date on which the applicable statutory credit begins to apply.
   1. The wages must be paid by the employer to an individual who, while acting in the course of business for the employer, was not self-employed.
   1. The wages must be paid on a regular basis (i.e., a monthly basis, rather than by payroll deposit).
   1. The wages must be earned by a qualifying individual (as defined in section 154(a)).

The credit is only available for payments made to eligible individuals who, at the time the qualifying individual’s gross income is determined, have taxable wages, and who have been an employee for at least one full calendar quarter. Qualifying individuals must satisfy one of the three requirements for the credit to apply to their tax liability:

1. They must have paid the applicable Federal and State gross income taxes, FICA taxes, and qualified expenditures on the qualifying employee’s behalf, whether or not those tax payments were reported on a Form 1099-MISC.
   1. They must have been an employee with the employer for a qualified number of calendar quarters at any point during that employee’s employment with the employer.
   1. They must have been an employee with the employer for at least one full calendar quarter.
   1. The qualifying employee must meet one of the following three requirements:
2. The employee must have been self-employed (as defined in section 498€) during the taxable quarter for which the qualifying employee’s gross income is determined.

ii. The qualified employment must have commenced at least one calendar quarter prior to the date on which the applicable statutory credit begins to apply.

iii. the qualified employment must have terminated on the taxable quarter when the applicable statutory credit begins to apply.

The qualifying employment, or dates when the qualifying employment commenced and terminated, and the taxable quarters during which the qualified employment commenced and terminated, and the month or months during which the taxable quarter was the qualifying employment’s qualifying quarter, if any, are not assumed to be continuous from year to year.

If an individual’s gross income for the taxable quarter is determined by adding or subtracting together all of the individual’s qualifying gross income for the qualifying quarters for which the individual met one or more of the requirements, then the ERC will not apply to that individual’s taxable income. However, the ERC will apply to the individual’s non-qualified gross income.

The ERC applies as of January 1, 2021, unless the taxpayer later becomes an employee with the employer for the qualifying employer for a qualifying number of calendar quarters before January 1, 2021. In such case, the ERC will apply to that individual’s taxable income for all of the taxable quarters that immediately precede and follow that individual’s later employment with the qualifying employer.

The qualified individual’s gross income is then compared to the total tax that would have been due, had the individual not received the qualifying payment. The individual’s actual taxable income will be determined by multiplying the actual taxable income by the adjusted gross income factor, based on the individual’s income for the taxable quarters for which the individual met one of the requirements above.

Conclusion

We have included few myths about Employee Retention Tax Credit. The combined effect of Section 199A and the ERC is to provide a substantial tax deduction for capital improvements made to employee-owned and -operated businesses, or to provide the employee-owners with a tax-free deduction for paying taxes on themselves for the non-qualified portion of their compensation. The taxpayer only needs to take certain actions to claim this tax benefit, depending on the facts and circumstances of the individual taxpayer.

What are the most common misconceptions about the ERC? What are some of the correct answers? Feel free to share with others. Hope you find this material helpful! We appreciate your understanding and feedback. Let’s keep a sharp eye out for other developments in EICs, as we move forward. You can also learn more about Section 199A by visiting the IRC web site at https://www.irs.gov/uac/businesses-self-employed-with-509d-gross-income