Employee Retention Credit: What it is and How to Claim it
One of the many programs created by the government to help businesses cope with the economic impact of the pandemic is the Employee Retention Credit (ERC). This credit is a tax incentive for certain businesses that kept their employees on the payroll despite experiencing a significant decline in revenue. In this article, we will discuss what the ERC is and how you can claim it.
What is the Employee Retention Credit?
The ERC is a refundable tax credit that was created by the CARES Act in March 2020 to encourage businesses to keep their employees on the payroll. The credit is applicable to qualifying businesses that have experienced either a partial or full suspension of operations due to government orders related to COVID-19 or at least a 50% decline in gross receipts when compared to the same quarter in the previous year.
The credit is worth up to $5,000 per employee for the entire year, and it is calculated as 50% of the qualified wages paid to each employee. For most businesses, the qualified wages are limited to $10,000 per employee per quarter. This means that the maximum credit a business can receive per employee is $5,000 for the entire year (50% of $10,000 x 2 quarters). However, for businesses that qualify for the ERC in 2021, the maximum credit per employee is $28,000 (70% of $10,000 x 4 quarters).
Who is eligible for the Employee Retention Credit?
There are specific eligibility requirements that businesses must meet to claim the ERC. The first requirement is that the business must have experienced either a partial or full suspension of operations due to government orders related to COVID-19 or at least a 50% decline in gross receipts when compared to the same quarter in the previous year.
Secondly, the business must have had an average of 500 or fewer full-time employees in 2019. Businesses that have more than 500 employees can still qualify for the ERC if they meet the gross receipts test mentioned above.
Finally, businesses that received a PPP loan can also claim the ERC, but the same wages cannot be used for both PPP loan forgiveness and the ERC. In other words, if a business used the PPP loan to pay wages, they cannot use those same wages to qualify for the ERC.
How to claim the Employee Retention Credit
To claim the ERC, businesses must report it on their quarterly Form 941, Employer’s Quarterly Federal Tax Return. The credit is claimed against the employer’s portion of Social Security tax. If the credit exceeds the amount of Social Security tax owed by the business, the excess can be refunded to the business.
If a business has already filed their Form 941 for a quarter in which they qualify for the ERC, they can file an amended Form 941 for that quarter to claim the credit. Alternatively, they can claim the credit on their next quarterly Form 941.
It’s important to note that businesses cannot claim the ERC and the Work Opportunity Tax Credit (WOTC) for the same employee during the same period. WOTC is another tax incentive that encourages businesses to hire employees from certain target groups, such as veterans and ex-offenders.
The Employee Retention Credit is a valuable tax incentive for businesses that have been hit hard by the pandemic. By keeping their employees on the payroll, businesses can not only claim the credit but also ensure that they have a dedicated and loyal workforce when things return to normal.
To claim the ERC, businesses must meet certain eligibility requirements and report it on their quarterly Form 941. If you believe your business qualifies for the credit, consult with your tax professional to ensure that you are taking advantage of all the tax incentives available to you.