As businesses face unprecedented challenges due to the COVID-19 pandemic, the employee retention tax credit (ERTC) has emerged as a valuable tool to help companies keep their employees on payroll. The ERTC is a refundable tax credit intended to provide financial assistance to eligible employers who are struggling with the economic fallout from the pandemic.
Understanding the ERTC
The ERTC is a tax credit that is designed to incentivize businesses to retain employees despite COVID-19-related hardships. The credit is available to employers who have experienced a significant decline in gross receipts or who have been subject to government-ordered shutdowns.
How Does the ERTC Work?
Eligible employers can receive a refundable tax credit equal to 50% of qualified wages paid to each employee, up to a maximum credit of $5,000 per employee for wages paid between March 13, 2020, and December 31, 2020. For the first two quarters of 2021, the credit has been increased to 70% of qualified wages paid, up to a maximum credit of $14,000 per employee.
To be eligible for the ERTC, employers must meet several requirements. Firstly, the employer must have experienced a significant decline in gross receipts. Specifically, the employer’s gross receipts must have fallen by more than 50% compared to the same quarter in the previous year. Alternatively, the employer may be eligible if they were forced to close due to government-mandated restrictions.
Secondly, the credit applies to qualified wages paid during the period when the business was experiencing hardship. For the first two quarters of 2021, this period extends from January 1, 2021, to June 30, 2021.
How to Claim the ERTC
Employers can claim the ERTC on their quarterly payroll tax returns, Form 941. They can also request an advance payment of the credit by completing Form 7200.
The Bottom Line
If you are an employer struggling with the economic fallout from the COVID-19 pandemic, the ERTC could provide much-needed assistance. By understanding the eligibility requirements and following the necessary steps to claim the credit, you can reduce your payroll tax liability and keep your business afloat during these challenging times. To find out more about the ERTC and how it can benefit your business, consult with a qualified tax professional.