The COVID-19 pandemic had a significant impact on businesses across the globe. In response to these unprecedented challenges, the U.S. government implemented various relief programs to help businesses maintain their workforce and stay afloat during these difficult times. One such initiative is the Employee Retention Credit (ERC), a refundable tax credit designed to incentivize employers to keep employees on their payroll. This guide will provide an overview of the ERC, discuss eligibility requirements and explain the application process.
The Employee Retention Credit was initially introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. It has since undergone modifications and extensions, so it is crucial for businesses to stay updated on the latest eligibility criteria. Businesses are eligible for the ERC if they meet one of the following requirements:
The business experienced a full or partial suspension of operations due to government orders related to COVID-19.
The business suffered a significant decline in gross receipts compared to the same quarter in 2019. This decline is defined as at least a 50% reduction in 2020 or a 20% reduction in 2021.
Notably, the ERC generally is available to all employers, subject to certain limitations. One such limitation is that the ERC may be reduced in 2020 if the employer had more than 100 full-time employees in 2019 and in 2021 if the employer had more than 500 full-time employees in 2019. Another such limitation is that the ERC may be reduced if the employer received a Paycheck Protection Program (PPP) loan that was forgiven.
The application process for the Employee Retention Credit is relatively straightforward. Employers can claim the credit by reporting their total qualified wages and the corresponding health insurance costs on their quarterly employment tax returns, typically through Form 941, Employer's Quarterly Federal Tax Return.
To calculate the credit, employers must determine the amount of qualified wages paid to employees during the eligible period. For 2020, the credit is equal to 50% of qualified wages, up to $10,000 per employee for the entire year. For 2021, the credit is equal to 70% of qualified wages, up to $10,000 per employee per quarter (for the first three quarters of 2021). Thus, an employer could potentially claim a tax credit of up to $26,000 per employee.
By understanding the eligibility requirements, application process, and benefits of the ERC, businesses can make informed decisions and take full advantage of the ERC. It is essential for businesses to stay up-to-date on any changes to the program and consult with a tax professional to ensure they are maximizing their relief opportunities.
Take advantage of the Employee Retention Credit (ERC) and maximize your tax savings today. Contact us now to learn more about how ERC can benefit your business and ensure you're not leaving money on the table.