- 📅 March 23, 2023 📝 Last updated on May 18th, 2023 🕒 5 minutes Read time
What good would a tax credit for keeping good employees have done when the world was facing a health crisis? However, this is merely scratching the surface of what ERC has to offer.
About 200,000 businesses in the United States shut down for good because of the pandemic. Not only that, but 8.5% of businesses in the United States have followed suit in recent years.
Some businesses, however, made the conscious decision to weather the storm and grab life preservers as they became available.
The timely release of the federal government’s life vest was crucial. As a result of the previously undervalued lifeline thrown toward small businesses and employees, both groups responded differently to the Covid-19 wave.
What Is Employee Retention Credit?
For small businesses to receive financial assistance during the pandemic, Congress established the Employee Retention Tax Credit (ERTC) in March 2020. The ERTC has undergone two expansions since then, allowing more struggling businesses to benefit from its ability to reduce their federal tax burden.
By filing Form 941-X for each quarter in which they paid taxable wages, eligible employers can retroactively claim the employee retention credit. The deadline for filing this form is three years after the payroll taxes were originally due. For 2020, businesses have until April 15, 2024, and for 2021, they have until April 15, 2025, to submit their claims for the ERTC. Learn more about the ERTC and how to make the most of it below.
Who Is Eligible?
In order to qualify for the Employee Retention Credit, an employer’s quarterly gross receipts or the number of employees must have decreased as a direct result of the pandemic (ERC). The start date of the program was March 13, 2020, and the conclusion date is September 30, 2021.
If you meet the requirements, you have until April 15, 2024, to apply for an ERC in 2020, and you have until April 15, 2025, to apply for an ERC tax credit in 2021.
Even if a company has already received a PPP loan, it may still be eligible for the ERC; however, the ERC will only apply to wages that are not already being used to repay the PPP loan. The ERC is available to businesses that meet certain criteria.
- Did a government order related to COVID-19 cause the complete or partial closure of your company?
- Have any of your quarterly gross receipts dropped by 20% or more when compared to the corresponding quarter last year?
It’s worth noting that the ERC is a grant, not a loan, in the form of a refundable tax credit. This means that eligible businesses can get a quarterly tax credit of up to $5,000 per employee.
What Kinds of Income Are Qualified?
A refundable tax credit of up to $5,000 per employee may be claimed through the Employee Retention Tax Credit (ERTC). Employers with 500 or fewer workers who have had all or part of their operations halted per a government order related to COVID-19 or who have seen a decline in gross receipts of at least 20% from the same quarter the previous year are eligible for this credit. This credit applies to wages earned and paid between March 12, 2020, and September 30, 2021.
Compensation for time worked, as well as compensation for time worked during a furlough, are both examples of wages that meet the requirements.
- Compensation for sick days and family leave under the Families First Coronavirus Response Act
- Health plan expenses that are allocable to wages paid
- Vacation, parental, family, medical, and sick leave pay
This reimbursement applies only to FICA-taxed salaries, not those paid to a business owner’s family.
Paycheck Protection Program loan applicants are now eligible for the ERC if they do not use PPP loan funds for wage payments or apply for PPP debt forgiveness. Companies can choose ERC or PPL loan forgiveness. They can apply for ERC if their pardon is denied. The ERC covers all wages, not only PPP loan-funded ones.
Submitting an ERC Claim for Your Small Business
You have two options for submitting your credit claim after you’ve done the math.
- You can submit your electronic quarterly payroll tax deposits to the IRS using Form 941 and claim the ERC at the same time.
- As you submit your company’s payroll tax deposits, you can choose to withhold the credit difference if the ERC amount is less than the deposits; or
- An ERC Advance is available to companies whose ERC balances exceed their payroll deposits. Before filing the business’s quarterly payroll deposits, you must first complete and submit IRS Form 7200 electronically in order to qualify for the ERC Advance.
If you prefer to file a paper Form 941x with the IRS to claim the ERC quarterly (beginning with the second quarter of 2020), you can do so.
How to Calculate the Employee Retention Credit in 2023
An employer must first determine in 2020 for which quarters (1-4) of that tax year they are eligible for the Employee Retention Credit in order to calculate it for 2022 and 2023. Once they have the qualifying periods, they can figure out how much time off should be given to each worker. In 2020, qualifying wages can only amount to up to $5,000, or 50% of the first $10,000 in compensation for each employee.
In 2021, an employee’s qualifying wages can only be up to 70% of the first $10,000 in compensation for each qualifying quarter (there are typically 3 qualifying quarters per year). Each employee is eligible for a $7,000 credit during the first three months of 2021. If a business meets the requirements for all three quarters (1-3) of 2021, it can receive a maximum credit of $21,000 for that year. If you’re still confused, reach out to EBoost Partners to get the right advice on how to calculate employee retention tax credit for your company.
Employee Retention Tax Credit: FAQs
ERC and PPP claims could not be submitted at the same time in the past. The employee retention credit and PPP were made available to eligible employers thanks to the clarity provided by the Consolidated Appropriations Act (CAA), which was passed in December 2020. The qualified wages are deducted from the payroll. To put it another way, an organization cannot deduct the same payroll cost for both the ERC wage and the PPP loan.
The company cannot use the money for any reason it pleases. There is a tax credit available of up to 70% of each employee’s quarterly wages up to $10,000.
As a refundable tax credit, ERC is a grant rather than a small business retention loans and therefore does not need to be repaid by businesses.
Income earned through ERC is exempt from further taxation for employees. Since ERC is considered a legitimate business expense, employers can deduct their contributions as well.
In 2021, the ERC credit will increase to 70% and is applicable in 2023.
The last day of the program was January 1, 2021. The ERC credit is not retroactive, but employers who paid employees between March 12, 2020, and January 1, 2021, and saw a drop in business can still apply.
The ERC is a tax break that the government provides to businesses. The sum is the government’s reimbursement for wages paid to workers during the pandemic’s difficult times. It’s money you