As a business owner, your cashflow is essential to keeping your operations running smoothly. Whether you’re just starting out or have been in business for years, one tool that can help you improve your cashflow is the employee retention tax credit (ERTC). With the ERTC, you can claim a tax credit for a percentage of wages paid to employees, which can help you reduce your tax liability and boost your cashflow.
Here’s what you need to know about the ERTC and how to use it strategically to improve your cashflow:
What is the employee retention tax credit?
The ERTC is a tax credit that was created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. The purpose of the credit is to encourage businesses to retain their employees during the COVID-19 pandemic by providing a financial incentive. The amount of the credit is equal to 50% of qualified wages paid to each employee, up to a maximum of $5,000 per employee.
Who is eligible for the employee retention tax credit?
Businesses of all sizes that have experienced a significant decline in revenue due to the COVID-19 pandemic may be eligible for the ERTC. Specifically, businesses must meet one of two criteria:
1. The business underwent a full or partial suspension of operations due to a government order related to COVID-19.
2. The business experienced a significant decline in gross receipts in any quarter of 2020 compared to the same quarter in 2019.
How to use the employee retention tax credit to boost your cashflow
To use the ERTC strategically to improve your cashflow, there are a few key steps to follow:
1. Determine your eligibility: First, determine whether your business is eligible for the ERTC based on the criteria outlined above. If you’re unsure, consult with a tax professional.
2. Calculate your credit: If you’re eligible, calculate your potential credit based on the wages you’ve paid to your employees during the eligible period. Keep in mind that you can only claim the credit for wages paid between March 13, 2020, and December 31, 2021.
3. Maximize your credit: To maximize your credit, consider strategies such as retaining employees who might be at risk of layoffs or furloughs, increasing wages for eligible employees, or adjusting your staffing levels to meet business demands in a way that maximizes your credit.
4. Claim your credit: Finally, you’ll need to claim your credit on your tax return. This can be done through the Form 941, which is typically filed quarterly. Be sure to keep detailed records of your wages and the credit you’re claiming in case of an audit.
Overall, the employee retention tax credit can be a valuable tool for business owners looking to improve their cashflow. By following these steps and using the credit strategically, you can reduce your tax liability and keep your business running smoothly during these challenging times.