As a business owner, you know that finding and keeping quality employees is essential to the success of your company. But with competition fierce for top talent, it’s not always easy to keep your team intact. The good news: The employee retention tax credit (ERTC) is a key tax break that can help.
What is the ERTC?
The ERTC is a refundable tax credit created as part of the CARES Act in March 2020. Initially, the credit allowed eligible employers to receive a credit for up to 50% of qualified wages paid to employees between March 12, 2020 and December 31, 2020.
In December 2020, the Consolidated Appropriations Act (CAA) extended and modified the ERTC through June 30, 2021. Under the CAA, the ERTC allows eligible employers to receive a credit for up to 70% of qualified wages paid to employees from January 1, 2021 to June 30, 2021, up to a maximum credit of $7,000 per employee per quarter.
Who’s eligible for the ERTC?
To qualify for the ERTC, you must meet one of two tests:
1. Your business was fully or partially suspended due to a government order related to COVID-19 during a calendar quarter, OR
2. Your business experienced a significant decline in gross receipts during a calendar quarter.
The significant decline in gross receipts test is met if gross receipts for any quarter in 2020 are less than 50% of gross receipts for the same quarter in 2019. For 2021, the threshold is lowered to less than 80% of gross receipts for the same quarter in 2019.
What are qualified wages?
Qualified wages are wages paid by an eligible employer to employees during the period of suspended operations or decline in gross receipts. For 2020, qualified wages are limited to $10,000 per employee per quarter. For 2021, qualified wages are limited to $10,000 per employee per quarter for the first two quarters, but increase to $12,000 per employee per quarter for the second half of the year.
Note that if you received a Paycheck Protection Program (PPP) loan, you can’t include wages paid with PPP loan proceeds in the calculation of qualified wages for the ERTC.
How to claim the ERTC
To claim the ERTC, eligible employers can either reduce their federal employment tax deposits or request an advance payment from the IRS. If your anticipated credit exceeds your federal employment tax liability, then you can apply for a refund or use the credit to offset other federal tax liabilities.
The ERTC is a valuable tax break that can help you retain employees and keep your business running during challenging times. If you think you may be eligible for the credit, speak with your accountant or tax professional to learn more.