The employee retention tax credit (ERTC) was introduced as part of the CARES Act to encourage businesses to keep their employees on the payroll during the COVID-19 pandemic. The ERTC is a refundable tax credit that equals 50% of qualified wages paid to employees, up to a maximum of $5,000 per employee.
To qualify for the ERTC, businesses must meet one of two criteria:
1. Experience full or partial suspension of business operations due to government orders related to COVID-19.
2. Show a significant decline in gross receipts. Eligible businesses can claim the tax credit for each quarter until its gross receipts exceed 80% of the comparable quarter in 2019.
Once a business has determined that it meets one of these criteria, it must determine its qualified wages. Qualified wages are those paid to employees during the period of either a full or partial suspension of business operations or when the business experienced a significant decline in gross receipts.
Qualified wages include:
1. Cash payments for employee wages and compensation, including health benefits.
2. Qualified non-cash fringe benefits that are included in gross income.
3. Contributions to employee retirement plans.
4. Contributions to employee health savings accounts.
5. Contributions to employee dependent care assistance programs.
It should be noted that qualified wages do not include wages paid to employees under the Families First Coronavirus Response Act (FFCRA), which provides paid sick leave and expanded family and medical leave for specified reasons related to COVID-19.
Once qualified wages have been determined, businesses can claim the ERTC on their quarterly employment tax returns (Form 941) by reporting the total qualified wages and the related credits for each quarter. If the credit exceeds the employer’s share of Social Security tax liability in any quarter, the excess credit is refundable.
To apply for the ERTC, businesses must complete lines 11b through 11j of Form 941 in each quarter they are eligible for the credit. Additionally, businesses must retain documentation to support their eligibility for the credit, including government orders related to COVID-19, evidence of a significant decline in gross receipts, and documentation of qualified wages paid to employees.
In conclusion, the ERTC provides a valuable tax credit for businesses that have experienced significant disruptions due to the COVID-19 pandemic. By following the guidelines outlined above, businesses can claim the credit and retain valuable resources for the continued operation of their businesses.