The employee retention credit (ERC) is a valuable tax credit that has been extended and expanded under the American Rescue Plan Act. This credit is designed to help businesses retain their employees during the ongoing COVID-19 pandemic, and it can provide substantial financial relief to eligible employers.
But who qualifies for the ERC, and how can businesses take advantage of this valuable tax credit? Let’s break it down.
Qualifying for the employee retention credit
To qualify for the ERC, employers must meet several criteria. First and foremost, the business must have experienced either a full or partial suspension of operations due to a government order related to COVID-19, or a significant decline in gross receipts.
Under the American Rescue Plan Act, this significant decline in gross receipts is defined as a 20% decline in gross receipts for the same calendar quarter in 2019. Previously, this threshold was set at a 50% decline, making it easier for businesses to qualify for the credit.
Additionally, the ERC is available to businesses of all sizes, including tax-exempt organizations. Start-up businesses that began operations after February 15, 2020, may also qualify for the credit, with special rules in place to determine average annual gross receipts.
Calculating the employee retention credit
The ERC is calculated based on qualified wages paid to eligible employees. For businesses with 500 or fewer full-time employees in 2019, qualified wages include wages paid to employees regardless of whether they worked or not. For businesses with more than 500 employees, qualified wages only include wages paid to employees when they were not providing services due to a COVID-19-related suspension or decline in gross receipts.
The credit is equal to 70% of qualified wages paid to employees, up to a maximum of $10,000 in wages per employee per calendar quarter. This means that the maximum ERC for each employee is $7,000 per calendar quarter.
Obtaining the employee retention credit
To claim the ERC, eligible employers must report the credit on their federal employment tax returns. The credit can be used to offset the employer portion of social security taxes, and any excess credit can be refunded to the employer.
Employers should keep detailed records of the qualified wages paid to employees, as well as documentation that supports the claim for the credit. This documentation may include government orders that resulted in the suspension of business operations, financial statements demonstrating the decline in gross receipts, and any other relevant information.
While claiming the ERC may seem complex, the financial benefits can be substantial for eligible employers. Businesses that have been significantly impacted by the COVID-19 pandemic should carefully consider whether they qualify for the credit and take advantage of this valuable tax relief.
In conclusion, the employee retention credit is a valuable tax credit that can provide much-needed financial relief to eligible employers. By understanding the qualifications and requirements for claiming the credit, businesses can take advantage of this opportunity to retain their employees and mitigate the economic impact of the ongoing pandemic.