employee retention is important for any business, but it’s especially crucial during challenging times like the current pandemic. Fortunately, the government has come up with several ways to incentivize businesses to retain their employees, with one of the most significant being the employee retention tax credit (ERTC).
If you’re a business owner wondering how to best leverage this credit, here’s a comprehensive guide that can help.
What is the employee retention tax credit?
The ERTC was introduced by the CARES Act in March 2020 and has been extended and expanded under subsequent legislation, including the Consolidated Appropriations Act of 2021 (CAA). It’s a refundable tax credit designed to encourage businesses to retain their employees despite economic challenges caused by the pandemic.
The ERTC offers your business a credit of up to 70% of up to $10,000 in wages per employee per quarter in 2021, up to a maximum of $28,000 per employee for the entire year. To qualify, your business must have experienced a significant decline in gross receipts, broadly defined as a decrease of 20% or more compared to the same quarter in 2019.
Who is eligible for the credit?
The ERTC is available to businesses of all sizes, including tax-exempt organizations, that experienced a significant decline in gross receipts due to Covid-19. Additionally, businesses that were fully or partially suspended by government orders due to Covid-19 are also eligible.
If your business was started after February 15, 2020, and has an average annual gross receipt of less than $1 million, you may be eligible for a modified version of the credit.
How to claim the credit
To claim the ERTC, you must file Form 941, Employer’s Quarterly Federal tax Return, with the IRS. You can claim the credit on your quarterly tax return for the period when you paid qualified wages.
For example, if you paid qualified wages in the first quarter of 2021, you can claim the credit on your second-quarter Form 941. If the credit exceeds the payroll taxes you owe, you can request a refund or apply it to future payroll tax deposits.
What types of wages qualify?
Qualified wages include salaries, wages, and commissions paid to employees. They must be paid between March 13, 2020, and December 31, 2021, and meet the following criteria:
– For businesses with 500 or fewer employees, all wages qualify, regardless of whether the employee is working or not. For businesses with more than 500 employees, only wages paid to employees who are not working qualify.
– For businesses with 500 or fewer employees, qualified wages are those paid during the period in which your business was fully or partially suspended due to Covid-19.
– For businesses with a significant decline in gross receipts, qualified wages are those paid during any quarter in which your gross receipts declined by 20% or more compared to the same quarter in 2019.
Take advantage of the ERTC today
The ERTC is a valuable tool for businesses looking to weather the pandemic and retain their employees. By understanding how the credit works and taking advantage of it, you can benefit from significant tax savings while keeping your workforce intact.
If you have questions about the ERTC or need assistance filing your Form 941, consider contacting a professional tax advisor for guidance.