In these challenging economic times, businesses across the nation are seeking ways to retain their valuable employees. The Employee Retention Tax Credit (ERTC) offers a glimmer of hope for companies looking to retain their workforce while receiving valuable tax benefits. In this comprehensive guide, we’ll walk you through the process of claiming the ERTC, ensuring you understand the eligibility criteria, calculation methods, and how to go about filing for this beneficial tax credit.
What is Employee Retention Tax Credit?
The Employee Retention Tax Credit is a provision under the Internal Revenue Code that was introduced to encourage businesses to retain their employees during times of economic hardship. It provides eligible employers with a tax credit based on qualified wages paid to eligible employees, helping to offset the financial strain caused by the pandemic or other challenging circumstances.
What Companies Qualify For The ERTC?
To qualify for the Employee Retention Tax Credit, companies must meet the following eligibility criteria:
Partial or Full Suspension of Operations: Businesses that experienced either a full or partial suspension of operations during any calendar quarter due to orders from an appropriate governmental authority, limiting commerce, travel, or group gatherings, may be eligible for the ERTC.
Significant Decline in Gross Receipts: Alternatively, businesses that did not face a suspension of operations can still qualify for the ERTC if they experienced a significant decline in gross receipts. A significant decline typically refers to a decline of 50% or more when compared to the same quarter in the previous year.
Average Employee Count: The ERTC is applicable to businesses of all sizes. However, companies with an average of 500 or fewer full-time employees in 2019 are generally eligible for the tax credit.
Which employees count toward eligibility?
Eligible employees are individuals employed by the qualified employer during the eligible quarters. They can include full-time and part-time employees, along with those on leave. However, the following employees may not be eligible for the ERTC:
Owners of more than 50% of the business or their family members
Government employees or elected officials
How to Calculate The Size of Your ERTC
The ERTC amount is determined based on qualified wages paid to eligible employees during the eligible quarters. The credit is calculated as 70% of qualified wages, up to a maximum of $10,000 per employee per calendar quarter. In simpler terms, this means that you can claim up to $7,000 per employee in tax credits per quarter.
For businesses with more than 500 employees, the ERTC can only be claimed for wages paid to employees who were not providing services during the period of partial or full suspension or experiencing reduced gross receipts.
Guidelines For New Businesses
New businesses that began operations after February 15, 2020, and before January 1, 2022, face a slightly different set of rules. Such companies can claim the ERTC if they experienced a significant decline in gross receipts, as defined earlier, for a quarter in 2022.
ERTC and PPP Can be Applied to The Same Payroll
One of the essential aspects of the ERTC is that it can be combined with the Paycheck Protection Program (PPP). Initially, businesses were restricted from claiming both benefits simultaneously. However, the Consolidated Appropriations Act and the American Rescue Plan Act removed this limitation, allowing eligible employers to apply for both the ERTC and PPP for the same payroll period.
How to Claim The ERTC
Claiming the Employee Retention Tax Credit involves several steps:
Step 1: Determine eligibility: Review the eligibility criteria mentioned above and ensure that your business qualifies for the ERTC.
Step 2: Calculate the credit: Calculate the credit amount by evaluating the qualified wages paid to eligible employees during the eligible quarters.
Step 3: File the necessary forms: To claim the ERTC, complete Form 941, the Employer’s Quarterly Federal Tax Return. The credit can be claimed for each calendar quarter as you report wages, tips, and other compensation paid to employees.
Step 4: Retain documentation: Maintain accurate records of the employment tax returns and other relevant documents, including employee wages, periods of suspension, and gross receipts, as these will be essential for substantiating your claim.
Step 5: Offset payroll taxes: The ERTC can be applied against the employer’s share of Social Security taxes (6.2%) or withheld federal income taxes. If the credit exceeds the payroll taxes owed, businesses can apply for a refund.
Talk With Your Accountant or Payroll Preparer about ERTC
The process of claiming the Employee Retention Tax Credit can be complex, especially for businesses with a large workforce and multiple payroll periods. Therefore, it’s highly recommended to consult with a qualified accountant or payroll preparer who can guide you through the process, ensure accurate calculations, and maximize your benefits.
The Employee Retention Tax Credit is a valuable tool that can help businesses retain their employees and provide a financial cushion during difficult times. By understanding the eligibility criteria, calculating the credit accurately, and properly filing the necessary forms, you can take advantage of this tax credit to support your workforce and strengthen your business’s financial position. Remember, consulting with a professional can make the process smoother, ensuring you make the most of this essential tax benefit.