As a business owner, one of your biggest expenses is likely your employees’ salaries and wages. But did you know there’s a little-known tax credit that can help you save big on those costs? It’s called the employee retention credit, or ERC, and it can provide a significant benefit to eligible employers.
The ERC was created as part of the CARES Act in 2020 and has been extended through 2021 under the Consolidated Appropriations Act. The purpose of the credit is to incentivize businesses to retain employees during the COVID-19 pandemic and any resulting economic downturns.
Essentially, the ERC allows eligible employers to claim a credit against certain employment taxes for a portion of the wages paid to each qualifying employee. The credit amount can be up to 70% of the qualified wages paid to each employee, with a maximum credit of $7,000 per employee per quarter.
To be eligible for the employee retention credit, your business must meet one of two criteria:
1. Your business was fully or partially suspended due to a government order related to COVID-19, or
2. Your business experienced a significant decline in gross receipts, defined as a 50% reduction in gross receipts for any calendar quarter in 2020 compared to the same quarter in 2019. In 2021, this threshold has been lowered to 20%.
If your business meets either of these criteria, you can then claim the ERC for wages paid from March 12, 2020, to December 31, 2021. The credit is claimed on your quarterly employment tax return, Form 941, and can be used to reduce your required deposits of payroll taxes.
It’s important to note that if you received a loan under the Paycheck Protection Program, or PPP, you may still be eligible for the ERC. However, you cannot use the same wages for both the ERC and PPP loan forgiveness.
Overall, the employee retention credit can be a significant way to save on taxes for eligible employers. With the ongoing impacts of the pandemic on businesses, it’s worth checking to see if your business qualifies for this credit and taking advantage of any potential savings.