The employee retention credit (ERC) was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. The ERC is a refundable tax credit that is designed to help businesses retain employees during the COVID-19 pandemic by providing financial relief to businesses that have been impacted by the pandemic.
In December 2020, the Consolidated Appropriations Act (CAA) expanded the ERC by making several changes to the program, including increasing the credit amount and extending the eligibility period through June 30, 2021. The American Rescue Plan Act further extended the ERC through the end of 2021 and made additional changes to the program to make it more accessible to businesses.
The ERC is a valuable resource for businesses, but navigating the program and understanding its complexities can be challenging. Here’s what businesses need to know about the ERC and how to navigate the process to maximize the benefits.
Eligibility and Qualified Wages
To be eligible for the ERC, a business must meet certain criteria, including experiencing either a significant decline in gross receipts or a full or partial suspension of business operations due to government orders related to the pandemic. In addition, businesses with 500 or fewer employees may be eligible to claim the credit for qualified wages paid to employees during the eligibility period.
Qualified wages are wages paid to employees that meet specific criteria, including being paid during the eligible period and not exceeding certain thresholds. For 2020, the credit can be claimed on up to $10,000 in qualified wages per employee per quarter. For 2021, the credit can be claimed on up to $10,000 in qualified wages per employee per quarter for the first two quarters, and up to $10,000 in qualified wages per employee per quarter for the last two quarters.
Calculating the credit
The ERC is calculated as a percentage of qualified wages paid to employees, with the maximum credit amount being 50% of qualified wages for 2020 and 70% of qualified wages for 2021. The maximum credit amount per employee is $5,000 for 2020 and $7,000 per employee per quarter for 2021.
Claiming the credit
Businesses can claim the ERC by filing Form 941, Employer’s Quarterly Federal tax Return, for the applicable quarters. The credit can be taken as a payroll tax credit or as an advance refundable credit. To claim the credit as a payroll tax credit, businesses can reduce their federal employment tax deposits for the applicable quarters. Alternatively, businesses can submit Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request an advance of the credit.
Navigating the Process
Navigating the ERC can be complex, and businesses should consider working with a tax professional to ensure they are maximizing the benefits of the program. tax professionals can help businesses determine their eligibility, calculate the credit amount, and navigate the process of claiming the credit.
It’s important for businesses to keep detailed records of their eligibility, qualified wages, and other pertinent information to support their claim for the ERC. Documentation should be maintained to substantiate the basis for the credit and the amount claimed in the event of an IRS audit.
The ERC is a valuable resource for businesses that have been impacted by the pandemic, and understanding the program and its complexities is critical to maximizing the benefits. By working with a tax professional and maintaining detailed records, businesses can navigate the process of claiming the ERC and access much-needed financial relief to retain their employees during these challenging times.