As an employer, you may be entitled to the employee retention tax credit (ERTC) if you experienced a significant decline in revenue due to the COVID-19 pandemic. This tax credit can help you keep your employees on payroll and keep your business running during these difficult times.
The ERTC was introduced in March 2020 under the CARES Act, and it has since been extended and modified through various relief bills, including the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021. The tax credit provides eligible employers with a refundable credit up to $7,000 per employee per quarter for wages paid between March 12, 2020, and December 31, 2021.
To be eligible for the ERTC, you must meet the following criteria:
1. Business operations were either fully or partially suspended due to a government order related to COVID-19, or your gross receipts in a calendar quarter in 2020 were less than 50% of the gross receipts for the same quarter in 2019. For 2021, you must meet this requirement if your gross receipts for any calendar quarter are less than 80% of the gross receipts for the same quarter in 2019.
2. You maintained an average of 500 or fewer full-time employees during 2019.
3. You continued to pay your employees during the time your business was either fully or partially suspended, or during the quarter when your gross receipts were below the threshold.
Once you determine your eligibility, you can calculate your tax credit using the following formula:
50% of qualified wages paid to each employee between March 12, 2020, and December 31, 2020 (up to $10,000 per employee per year) or between January 1, 2021, and December 31, 2021 (up to $10,000 per employee per quarter) minus any credits received under the Paycheck Protection Program (PPP) or other COVID-19 relief programs.
Qualified wages include all wages and health benefits paid to employees during the eligible period, including both full-time and part-time employees. However, wages paid to owners or their family members are not eligible for the tax credit.
If you are eligible for the ERTC, you can claim the credit on your quarterly employment tax returns or on Form 941, Employer’s Quarterly Federal tax Return. If the amount of the credit exceeds your payroll tax liability, you can request a refund of the excess credit using Form 7200, Advance Payment of Employer Credits Due to COVID-19.
To sum up, the employee retention tax credit can be a significant financial lifeline for eligible employers struggling to keep their business afloat during the COVID-19 pandemic. If you believe you may be eligible, it is crucial to consult with a tax professional to determine your eligibility and calculate your tax credit accurately.