As businesses continue to navigate the economic challenges posed by the COVID-19 pandemic, employee retention has become a top priority. One key tool in this effort is the employee retention tax credit (ERTC), a refundable tax credit designed to encourage businesses to keep their employees on the payroll during periods of economic uncertainty.
However, despite its potential benefits, the ERTC is a complex credit that requires careful planning and understanding to navigate effectively. Here’s what you need to know to make the most of the ERTC and boost your business’s chances of success.
What is the ERTC?
The ERTC is a refundable tax credit designed to help cover the costs of keeping employees on the payroll during economic crises. It was originally established as part of the CARES Act in 2020 and later extended and expanded under the Consolidated Appropriations Act and the American Rescue Plan Act.
Specifically, the credit is worth up to 70% of qualified wages paid between March 13, 2020, and December 31, 2021, with a maximum credit of $7,000 per employee per quarter.
Who is eligible for the ERTC?
To be eligible for the ERTC, businesses must meet several requirements. First, they must have experienced a significant decline in gross receipts during a 2020 or 2021 calendar quarter compared to the same quarter in 2019. Specifically, their gross receipts must have fallen by at least 50% compared to the previous year.
Alternatively, businesses may qualify for the credit if they were subject to a full or partial suspension of operations due to a government order related to COVID-19.
Finally, businesses with 500 or fewer employees are eligible for the credit, regardless of whether they experienced a decline in gross receipts or a suspension of operations.
How can businesses claim the ERTC?
To claim the ERTC, businesses must first determine their eligibility and the amount they are eligible to claim. This can be a complicated process, as different rules apply depending on the date and size of the business.
Businesses that qualify for the credit must then claim it on their quarterly employment tax returns, using IRS Form 941. Alternatively, they can request an advance payment of the credit using Form 7200.
It’s important to note that businesses cannot claim the ERTC for wages paid with funds from forgivable Paycheck Protection Program (PPP) loans. However, they can claim the credit for wages paid with other sources of federal, state, or local aid.
How can businesses maximize the benefits of the ERTC?
To make the most of the ERTC, businesses should consider several strategies. First, they should carefully track their eligible wages and document their eligibility for the credit to ensure they can claim it accurately and avoid potential audits or penalties.
Additionally, businesses should consider exploring all other sources of available aid, such as PPP loans or other tax credits, to maximize their financial support during this challenging time.
Finally, businesses should consult with a qualified tax professional to ensure they understand the complexities of the credit and can navigate it effectively. With careful planning and strategic use of the ERTC, businesses can help ensure their long-term success and resilience during these trying times.