employee retention tax credits (ERTCs) are a major focus of many businesses as they try to maintain their workforce during the ongoing COVID-19 pandemic. The credits are offered by the federal government as an incentive for businesses to keep employees on their payroll during the pandemic.
ERTCs work by providing a tax credit to businesses that keep their employees on the payroll despite facing economic hardship caused by the pandemic. The credits were first introduced through the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, and they have since been expanded to cover more businesses.
Eligibility for ERTCs
To be eligible for ERTCs, businesses must have experienced a decline in revenue or be fully or partially suspended due to government orders related to COVID-19. The decline in revenue must be at least 50% in any quarter of 2020, and for the first two quarters of 2021, businesses must show a decline of at least 20% compared to the same quarter in 2019.
Businesses that have been in operation for less than a year can use the prior quarter as a reference period to determine their eligibility for ERTCs.
Calculation of ERTCs
ERTCs are calculated based on the qualified wages paid to employees during the eligibility period. The maximum credit is 70% of the qualified wages paid, up to a maximum of $10,000 per employee per quarter.
The qualified wages are determined based on the average number of employees on the payroll during 2019 or the prior quarter if the business started operations during the 2020 eligibility period. Qualified wages can also include health plan expenses, but they cannot be used to calculate other tax credits, such as the research and development tax credit.
How to Claim ERTCs
ERTCs are claimed on quarterly employment tax returns, such as Form 941. Businesses can reduce their employment tax deposits by the expected credit amount or file for a refund of the credit.
Businesses that have already filed their quarterly employment tax returns for 2020 can file an amended return to claim the ERTC. The IRS has provided guidance on how to claim the credit retroactively, and businesses have until July 2021 to file amended returns for 2020.
The ERTC is a valuable tool for businesses to keep their employees on the payroll during the pandemic. Businesses should keep up-to-date with the eligibility and calculation requirements to take full advantage of the credit. The IRS has provided additional guidance and resources for businesses, and consulting with a tax professional can help ensure the credit is being used correctly.