The COVID-19 pandemic impacted businesses in unprecedented ways. To help, the government introduced the Employee Retention Credit (ERC). If you’re having difficulty keeping your employees on the payroll, the ERC might be right for you.
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable tax credit introduced as part of the CARES Act to support businesses during the COVID-19 pandemic. It was designed to incentivize employers to keep employees on their payroll, even during times of financial hardship.
The credit is equal to 70% of qualified wages paid to each employee, up to $10,000 per quarter, per employee.This means that employers can receive up to $28,000 in credits per employee for the entire period.1 The credits can be used to offset the employer’s liability for Social Security taxes, reducing the amount of taxes that the business must pay.
Initially, the ERC applied to wages paid in 2020 and 2021, with varying credit amounts depending on the quarter. The maximum credit available per employee has changed over time, making it essential for employers to stay updated on the latest regulations. Since it’s a refundable credit, employers may receive a refund if their credit exceeds the amount of payroll taxes they owe. The ERC has provided significant relief for businesses struggling to retain their workforce during a challenging economic period.
Eligibility For the Retention Credit
To be eligible for the ERC, a business must meet certain criteria based on their business operations during the pandemic.2 Generally, employers must have experienced a significant decline in gross receipts or been subject to a full or partial suspension of operations due to government orders related to COVID-19. The threshold for determining a significant decline in revenue differs depending on the tax year.
For 2020, businesses needed to show a 50% drop in gross receipts compared to the same quarter in 2019. In 2021, the requirement was relaxed to a 20% decline in revenue. Additionally, employers must have paid qualifying wages to their employees during the eligible periods. Small and mid-sized businesses are eligible for the credit, but larger employers may only claim the credit for wages paid to employees who were not providing services due to the pandemic’s impact.
Employee Retention Credit Application
Applying for the Employee Retention Credit involves completing specific IRS forms and providing documentation to support eligibility. Employers can claim the credit by filing Form 941, the employer’s quarterly federal tax return. For businesses that have already filed their tax returns but later discovered they were eligible for the ERC, they can file an amended return using Form 941-X to retroactively claim the credit.
It’s essential to maintain detailed records, including payroll documents and revenue comparisons, to substantiate the claim in case of an IRS audit. Employers should also check if they received a Paycheck Protection Program (PPP) loan, as there are restrictions on claiming the ERC for wages paid with forgiven PPP funds. Consulting with a tax professional or financial advisor is recommended to ensure all eligibility requirements are met and the application process is completed accurately.
Learn More About the ERC Program
The ERC Program is a crucial tool for businesses that are still struggling in the wake of the COVID-19 pandemic. However, time is running out to take advantage of this credit. The deadline to apply is fast approaching, with only a limited window of opportunity to claim the credit. You can find updated deadlines with a little research.
By providing a financial incentive for employers to retain their workforce, the ERC can help businesses save big and support their employees. Start a search to take advantage of this valuable credit before it’s too late.
