As a business owner, you may already be familiar with tax credits, but have you heard of the employee retention tax credit (ERTC)? This credit is designed to help eligible employers keep their employees on payroll during the COVID-19 pandemic. If you want to know everything about this credit, then you’ve come to the right place.
What is the employee retention tax credit?
The employee retention tax credit is a refundable tax credit that was introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This credit is designed to help eligible employers keep their employees on payroll during the COVID-19 pandemic. It aims to provide financial relief to businesses impacted by the pandemic to help retain their employees.
Who is eligible for the employee retention tax credit?
Eligible employers include those who have been affected by the COVID-19 pandemic, such as those who have experienced a significant decline in revenue or have had to shut down their operations due to government-mandated restrictions.
To be eligible, employers must also meet one of the two following criteria:
– The employer’s business was fully or partially suspended by order of a government authority due to the COVID-19 pandemic. This suspension must have been in effect for a full calendar quarter.
– The employer experienced a significant decline in gross receipts, which is defined as a decrease of more than 50% in gross receipts for any quarter in 2020 compared to the same quarter in 2019.
How much is the employee retention tax credit?
The employee retention tax credit is worth up to 70% of qualified wages paid to eligible employees, up to a maximum of $10,000 per employee, per quarter. This means that the maximum credit per employee is $7,000 per quarter.
How does a business claim the employee retention tax credit?
To claim the employee retention tax credit, eligible employers must report their qualified wages and the related credit for each calendar quarter on their federal employment tax returns, usually the quarterly Form 941. The credit is then applied against payroll taxes, and any excess credit is refunded to the employer.
Employers can also request advance payment of the credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. This form allows eligible employers to request an advance payment of the credit instead of waiting to claim it on their employment tax returns.
What are qualified wages for the employee retention tax credit?
Qualified wages are wages and compensation paid to eligible employees during the time in which the employer meets the eligibility criteria. The amount of qualified wages is limited to $10,000 per employee, per quarter.
For employers with more than 100 full-time employees, qualified wages are limited to wages paid to employees who are not providing services due to the employer’s suspension or due to a significant decline in gross receipts.
For employers with 100 or fewer full-time employees, all wages paid to all employees during the eligibility period are considered qualified wages.
Conclusion
The employee retention tax credit is an important relief measure introduced under the CARES Act to help businesses impacted by the COVID-19 pandemic retain their employees. Eligible employers can claim up to 70% of qualified wages paid to eligible employees, up to a maximum credit of $10,000 per employee, per quarter. To claim the credit, employers must report their qualified wages on their federal employment tax returns. They can also request an advance payment of the credit by submitting Form 7200. By understanding the details of the ERTC and properly applying for it, your business can gain access to this valuable financial relief during these challenging times.