As businesses continue to navigate the economic impact of the COVID-19 pandemic, the employee retention tax credit (ERTC) has become a valuable tool for businesses to reduce their payroll tax burden and increase their cash flow. In fact, the ERTC was recently extended and expanded by the American Rescue Plan Act of 2021, making it even more beneficial for businesses looking to retain their employees.
So, what exactly is the ERTC and how can businesses qualify for and claim it? Here’s your complete guide.
What is the employee retention tax credit?
The ERTC is a refundable payroll tax credit designed to encourage businesses to keep employees on their payroll during the COVID-19 pandemic. The credit is equal to 70% of qualified wages paid to eligible employees, up to a maximum of $7,000 per employee per quarter.
Who is eligible for the employee retention tax credit?
Under the Consolidated Appropriations Act of 2021, businesses that experienced a significant decline in gross receipts or were fully or partially shut down due to government orders related to COVID-19 are eligible for the ERTC. Specifically, businesses are eligible for the credit if:
– They experienced a decline in gross receipts of at least 20% in a calendar quarter compared to the same quarter in 2019. For businesses that were not in operation in 2019, they can compare their gross receipts to the same quarter in 2020.
– They were fully or partially shut down by government order due to COVID-19 during the calendar quarter, and their gross receipts during the quarter were less than 80% of their gross receipts for the same quarter in 2019.
In addition, businesses with 500 or fewer employees can claim the credit for all wages paid to employees, regardless of whether they were working or not. For businesses with more than 500 employees, the credit only applies to wages paid to employees who were not working due to COVID-19.
How do businesses claim the employee retention tax credit?
To claim the ERTC, businesses must file Form 941, the employer’s quarterly federal tax return, with the IRS. The credit is taken against the employer portion of Social Security tax, and any amount that exceeds the employer’s total liability for Social Security tax can be refunded to the business.
In addition, businesses can now claim the ERTC for the first two quarters of 2021, up to a maximum of $7,000 per employee per quarter. This means that businesses could potentially claim up to $28,000 per eligible employee for the first half of 2021.
Overall, the ERTC is a valuable tool for businesses looking to retain their employees and offset their payroll tax burden during the COVID-19 pandemic. By understanding the eligibility requirements and claiming process, businesses can take advantage of this credit and improve their cash flow during these challenging times.