One of the challenges of running a business is finding qualified and reliable employees who will stick around for the long haul. High turnover rates not only affect productivity, but also hit the bottom line with additional recruitment and training costs. Fortunately, the federal government offers employee retention tax credits to eligible employers, helping to offset the costs of retaining employees.
The employee retention credit (ERC) was introduced as part of the CARES Act in 2020 in response to the COVID-19 pandemic. Initially, it was available only to businesses that experienced a significant decline in gross receipts or were fully or partially suspended due to government orders. However, the latest COVID-19 relief bill has expanded eligibility criteria to include all eligible employers, not just those directly affected by the pandemic.
So, what does this mean for employers? It means that more businesses can now claim the ERC, which equals 70% of qualified wages paid to eligible employees, up to a maximum credit of $28,000 per employee for 2021 (up from $5,000 in 2020). The qualified wages include those paid between January 1, 2021 and December 31, 2021 and must meet certain criteria, such as being subject to Social Security taxes and not being paid from Paycheck Protection Program (PPP) loans.
To claim the ERC, eligible employers must complete Form 941, which is used to report quarterly federal taxes, such as income tax withholding and Social Security and Medicare taxes, to the IRS. However, if you have already filed Form 941 and did not claim the ERC, you can still take advantage of the credit by using Form 941-X.
Form 941-X, or Adjusted Employer’s Quarterly Federal tax Return or Claim for Refund, is used to correct errors on previously filed Form 941s. It is also used to claim any missed tax credits or refunds, such as the ERC. Essentially, it is a way to amend your previously filed Forms 941 and claim the credit for the portion of the year that you were eligible.
To maximize your employee retention tax credits, it is important to be aware of the eligibility criteria and stay on top of your filing deadlines. It is recommended that you consult a tax professional to ensure that you are correctly calculating and claiming the credit.
In summary, employee retention tax credits can offer significant savings to eligible employers who are committed to retaining their workforce. By using Form 941-X to claim the ERC, you can not only reduce your tax liability but also invest in the long-term stability and growth of your business.