Maximizing Benefits: A Step-by-Step Guide to Reporting employee retention credit on your 1120S
The employee retention credit (ERC) is a valuable tax credit that was introduced as part of the COVID-19 relief legislation. This credit is designed to incentivize businesses to keep their employees on payroll during the pandemic by providing a refundable tax credit for eligible employers. If you operate a business structured as an S Corporation and want to maximize the benefits of this credit, here is a step-by-step guide to reporting it on your 1120S tax return.
Step 1: Determine your eligibility
Before you can claim the employee retention credit, it is essential to determine whether your business meets the eligibility criteria. To qualify, your business must have:
1. Experienced either a significant decline in gross receipts (more than 20%) or a full or partial suspension of operations due to COVID-19.
2. Employed less than 500 full-time employees (including related entities) in 2019.
3. Continued to pay wages to employees during the eligible period.
Step 2: Calculate the credit amount
Once you have determined your eligibility, you need to calculate the amount of employee retention credit you are entitled to claim. The credit is equal to 50% of qualifying wages paid to employees, up to a maximum of $10,000 per employee for the entire credit period (March 13, 2020, to December 31, 2020).
Step 3: Determine the applicable quarters
The employee retention credit is available based on wages paid during specific calendar quarters. For the tax year 2020, the eligible quarters are:
1. Q2 2020: Wages paid between March 13, 2020, and June 30, 2020.
2. Q3 2020: Wages paid between July 1, 2020, and September 30, 2020.
3. Q4 2020: Wages paid between October 1, 2020, and December 31, 2020.
Step 4: Report the credit on Form 8974
To claim the employee retention credit on your 1120S tax return, you must use Form 8974, “Qualified Small Business Payroll tax credit for Increasing Research Activities.” This form is used to calculate and report the credit and must be filed along with your corporate tax return.
Step 5: Prepare Schedule K
Next, you need to prepare Schedule K on your 1120S tax return. This schedule reports the total credit amount claimed for each eligible quarter. You’ll need to fill out Part II of Schedule K, which specifically addresses the employee retention credit.
Step 6: Complete Form 5884-C
Alongside Form 8974, you must also complete Form 5884-C, “Work Opportunity credit and the credit for Employer Social Security and Medicare Taxes Paid on Certain employee Tips.” This form ensures that the credit is properly coordinated with other employment tax credits.
Step 7: File your tax return
After completing the necessary forms and schedules, you can file your 1120S tax return. Make sure to include all the required documentation and file within the prescribed deadline to avoid any penalties or delays.
Step 8: Retain supporting documents
Lastly, it is crucial to retain all documents supporting your claim for the employee retention credit. These may include payroll records, financial statements, documentary evidence of the decline in gross receipts, and any other relevant documentation. Retaining these records will help in case of any future audits or inquiries.
Maximizing the benefits of the employee retention credit is a strategic move for S Corporation businesses during these challenging times. By following this step-by-step guide, you can ensure accurate reporting and claim the credits your business is entitled to, providing much-needed relief and financial support.