As a business owner, it is important to understand the various tax credits and incentives available to help you manage your operating expenses. One tax credit that could benefit your business is the employee retention tax credit (ERTC).
What is the employee retention tax credit (ERTC)?
The ERTC is a refundable tax credit that was introduced as part of the CARES Act to help businesses retain their employees during the COVID-19 pandemic. The credit allows eligible employers to claim a tax credit of up to 50% of the qualified wages paid to their employees, up to a maximum of $10,000 per employee.
Who is eligible for the employee retention tax credit (ERTC)?
To be eligible for the ERTC, businesses must have experienced a significant decline in gross receipts or have been fully or partially shut down due to COVID-19. The decline in gross receipts must be at least 50% when compared to the same quarter of the previous year. Businesses that were not in operation during the previous year can compare their current quarter revenue to the average revenue for the two preceding quarters.
Additionally, businesses can also qualify for the ERTC if they have been ordered by the government to fully or partially shut down operations due to COVID-19. The credit is available to businesses of all sizes, including non-profits, with the exception of state and local government entities and their instrumentalities.
How can business owners claim the employee retention tax credit (ERTC)?
Business owners can claim the ERTC by filing Form 941, Employer’s Quarterly Federal tax Return, with the Internal Revenue Service (IRS). In addition to claiming the credit on Form 941, businesses can also request advance payment of the credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
It is important to note that businesses cannot claim the ERTC for the same wages used to claim other COVID-19 related tax credits, such as the Paycheck Protection Program (PPP) forgiveness or Families First Coronavirus Response Act (FFCRA) paid sick leave credit.
What are qualified wages under the employee retention tax credit (ERTC)?
Qualified wages include wages and compensation paid to employees between March 12, 2020, and December 31, 2021. For businesses that had an average of 500 or fewer full-time employees in 2019, all employee wages qualify for the ERTC. For businesses that had more than 500 full-time employees in 2019, only wages paid to employees who were not working due to COVID-19 qualify for the credit.
Conclusion
The employee retention tax credit (ERTC) is a valuable tax credit that can help businesses manage their operating expenses during the COVID-19 pandemic. As a business owner, it is important to understand who is eligible for the credit, how to claim it, and what wages qualify for the credit. Consult with your tax advisor or accountant to ensure that you take advantage of all tax credits and incentives available to your business.