The COVID-19 pandemic has affected businesses in numerous ways, including a fluctuation in their workforce. While some businesses have faced layoffs and furloughs, others have been able to retain their employees. To support the latter, the IRS has introduced the employee retention tax credit.
This tax credit offers businesses an opportunity to receive financial support for retaining their employees during the pandemic. It’s important to note that businesses that have taken a Paycheck Protection Program loan are not eligible to claim this credit.
So, how can businesses qualify for the employee retention tax credit?
1. Eligibility Period
To qualify for the employee retention tax credit, a business must have experienced a significant reduction in gross receipts during a calendar quarter. This period is either:
– Beginning on January 1st, 2021, and ending on December 31st, 2021
– Beginning on January 1st, 2020, and ending on June 30th, 2021
2. Percentage of Reduced Gross Receipts
To qualify, a business must have experienced a reduced gross receipt of either:
– Less than 80% of their gross receipts from the same calendar quarter in 2019
– Less than 80% of their gross receipts from the same calendar quarter in 2020
The business can compare their gross receipts from the respective quarters to determine if they meet the qualification criteria.
3. retention of Employees
The business must also retain their employees. They may not have laid off or furloughed any employees from March 12th, 2020, through January 1st, 2022. This can be confirmed by reviewing their quarterly payroll reports.
4. credit Calculation
The credit amount is based on each employee‘s qualified wages, with a maximum amount of $28,000 per employee in 2021. The credit will be 70% of qualified wages paid between January 1st, 2021, and December 31st, 2021.
5. Claiming the credit
The business must fill out Form 941 to claim the credit. This form should be filed quarterly after the end of every calendar quarter. Businesses can also request an advance payment of the tax credit from the IRS.
In conclusion, the employee retention tax credit can be an excellent way for businesses to receive financial support for retaining their employees during the pandemic. By meeting the above criteria, businesses can successfully qualify for the credit and receive the benefits it offers. Businesses can consult with a tax professional to ensure they meet all requirements and avoid any errors.