Key Takeaways:
- The Employee Retention Tax Credit (ERTC) and the Earned Income Tax Credit (EITC) are two refundable tax credits that can help eligible businesses and workers reduce their tax liability and increase their refund.
- The ERTC is available to businesses and organizations that had employees and were affected by the COVID-19 pandemic. The EITC is available to low- to moderate-income workers and families who meet certain criteria.
- The deadline to apply for both credits is January 31, 2024. To claim the ERTC, you need to file Form 941 or Form 941-X with the IRS. To claim the EITC, you need to file Form 1040 or Form 1040-SR with the IRS.
- You can use the IRS tools and resources to check your eligibility, calculate your credit amount, and avoid common errors and scams.
If you are looking for ways to save money on your taxes in 2024, you may want to consider two refundable tax credits that can benefit you and your business: the Employee Retention Tax Credit (ERTC) and the Earned Income Tax Credit (EITC).
These two credits are designed to help employers and employees who were affected by the COVID-19 pandemic and the economic downturn. They can provide a significant reduction in your tax bill, or even a refund, depending on your situation.
However, you need to act fast, as the deadline to apply for both credits is January 31, 2024. In this article, we will explain what these credits are, who can qualify, how to claim them, and what to watch out for.
IMPORTANT LINKS:
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- What Happens to Your CPP and OAS Benefits When Your Spouse Dies?
- How to Get the Grocery Rebate Payments in Canada in January 2024
What is the Employee Retention Tax Credit (ERTC)?
The Employee Retention Tax Credit (ERTC) – sometimes called the Employee Retention Tax Credit or ERTC – is a refundable tax credit for certain eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic¹².
The credit is equal to a percentage of qualified wages paid to an employee, up to a maximum amount per employee, depending on the time period for which you claim the credit. The credit also includes qualified health plan expenses that are allocable to the wages.
The ERTC was established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020, and was extended and modified by subsequent legislation, including the American Rescue Plan Act of 2021 (ARPA) in March 2021.
The ERTC is available for wages paid from March 12, 2020, to December 31, 2021. The requirements and the credit amount vary depending on the quarter for which you claim the credit. Here is a summary of the ERTC rules by quarter:
| Quarter | Eligibility Criteria | Credit Rate | Maximum Wages | Maximum Credit |
|---|---|---|---|---|
| Q1-Q2 2020 | Business fully or partially suspended by government order due to COVID-19, or gross receipts decline by more than 50% compared to the same quarter in 2019 | 50% | $10,000 per employee for the year | $5,000 per employee for the year |
| Q3-Q4 2020 | Business fully or partially suspended by government order due to COVID-19, or gross receipts decline by more than 20% compared to the same quarter in 2019 | 50% | $10,000 per employee for the quarter | $5,000 per employee for the quarter |
| Q1-Q2 2021 | Business fully or partially suspended by government order due to COVID-19, or gross receipts decline by more than 20% compared to the same quarter in 2019 | 70% | $10,000 per employee for the quarter | $7,000 per employee for the quarter |
| Q3-Q4 2021 | Business fully or partially suspended by government order due to COVID-19, or gross receipts decline by more than 20% compared to the same quarter in 2019, or recovery startup business (new business that began operations after February 15, 2020, and had average annual gross receipts of $1 million or less) | 70% | $10,000 per employee for the quarter | $7,000 per employee for the quarter |
The ERTC is not available to individuals, federal, state, or local governments, or businesses that received a Paycheck Protection Program (PPP) loan, unless they returned or did not use the loan proceeds.
What is the Earned Income Tax Credit (EITC)?
The Earned Income Tax Credit (EITC) – sometimes called EIC – is a refundable tax credit for low- to moderate-income workers and families who meet certain criteria⁴⁵.
The credit is based on your earned income, which includes wages, salaries, tips, self-employment income, and other taxable employee compensation. The credit also depends on your filing status, the number of qualifying children you have, and your adjusted gross income (AGI).
The EITC can reduce the taxes you owe, and may even result in a refund if the credit exceeds your tax liability. The credit amount varies depending on your situation, but for tax year 2021, the maximum credit ranges from $600 to $7,430.
To qualify for the EITC, you must meet the following requirements:
- You must have earned income from working for someone else or running or owning a business or farm.
- Your earned income and AGI must be less than certain limits, which vary by filing status and number of children.
- Your investment income must be $10,000 or less for the year.
- You must have a valid Social Security number for yourself, your spouse (if filing jointly), and any qualifying child.
- You must file a tax return, even if you don’t owe any tax or are not required to file.
- You must use the filing status of single, married filing jointly, head of household, or qualifying widow(er). You cannot use the filing status of married filing separately.
- You must be a U.S. citizen or resident alien for the entire year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
- You cannot be a qualifying child of another person who claims the EITC.
- You must be at least 25 but under 65 at the end of the year, unless you have a qualifying child.
- You cannot file Form 2555 or Form 2555-EZ (relating to foreign earned income).
The IRS provides several tools and resources to help you check your eligibility, calculate your credit amount, and avoid common errors and scams. You can use the EITC Assistant, the EITC Qualification Checklist, the EITC Income Limits and Credit Tables, and the EITC Central website to learn more about the EITC.
How to Claim the Employee Retention Tax Credit and the Earned Income Tax Credit
If you are eligible for both the ERTC and the EITC, you can claim them on your tax returns for 2021 and 2022. However, you need to file different forms and follow different procedures for each credit.
How to Claim the Employee Retention Tax Credit
To claim the ERTC, you need to report your qualified wages and related health plan expenses on your federal employment tax return, usually Form 941, Employer’s Quarterly Federal Tax Return. You can reduce your required deposits of payroll taxes by the amount of the credit, or request an advance payment of the credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
If you already filed your employment tax return and did not claim the ERTC, but you are eligible for it, you can file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to claim the credit and get a refund.
You should keep records to support your claim, such as documentation to show how you determined your eligibility, how you calculated your qualified wages and health plan expenses, and how you reduced your payroll tax deposits or requested an advance payment.
You should also be aware of the potential penalties and interest that may apply if you claim the ERTC incorrectly, or if you are involved in any fraudulent or abusive schemes to claim the credit. The IRS has issued guidance and FAQs to help you understand the rules and avoid common errors and scams.
How to Claim the Earned Income Tax Credit
To claim the EITC, you need to file your federal income tax return, usually Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors. You also need to attach Schedule EIC, Earned Income Credit, if you have a qualifying child.
You can use the IRS Free File program, a Volunteer Income Tax Assistance (VITA) site, or a reputable tax professional to prepare and file your return. You can also use the IRS Where’s My Refund tool or the IRS2Go app to track the status of your refund.
You should keep records to prove your income, expenses, and eligibility, such as your W-2 forms, 1099 forms, bank statements, receipts, and Social Security cards. You should also be aware of the potential penalties and interest that may apply if you claim the EITC incorrectly, or if you are involved in any fraudulent or abusive schemes to claim the credit. The IRS has issued guidance and FAQs to help you understand the rules and avoid common errors and scams.
Conclusion
Thank you for reading this article. We hope you found it helpful and informative. If you have any questions or feedback, please feel free to leave a comment below. We would love to hear from you.
If you are interested in learning more about the ERTC, the EITC, or other tax-related topics, you can visit our website, HustleHub, where we provide valuable resources and tips for hustlers like you. You can also subscribe to our newsletter, follow us on social media, or contact us for personalized advice.
Remember, the deadline to apply for both the ERTC and the EITC is January 31, 2024. Don’t miss this opportunity to save money on your taxes and boost your income. Apply today and claim your credits.
Source: (1) Employee Retention Credit | Internal Revenue Service. https://www.irs.gov/coronavirus/employee-retention-credit. (2) Frequently asked questions about the Employee Retention Credit. https://www.irs.gov/coronavirus/frequently-asked-questions-about-the-employee-retention-credit. (3) Earned Income Tax Credit (EITC) | Internal Revenue Service. https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit-eitc.