The COVID-19 pandemic has affected small businesses in many ways, and one of the most significant impacts has been on employee retention. With many businesses facing reduced revenue and increased costs, it has become increasingly difficult to keep employees on the payroll. However, small businesses can take advantage of the employee retention tax credit (ERTC), a program that provides a tax credit for businesses that retain their employees during difficult times.
The ERTC was initially created as a provision of the CARES Act, which was passed in March 2020 to provide economic relief to businesses affected by the pandemic. It was later extended and expanded under the Consolidated Appropriations Act, which was signed into law in December 2020. The credit is available to businesses of all sizes, including tax-exempt organizations, that either:
1. Had to fully or partially suspend operations due to governmental orders related to COVID-19, or
2. Experienced a significant decline in gross receipts during any quarter of 2020 or 2021.
The credit is equal to 70% of eligible wages paid to each employee, up to a maximum credit of $7,000 per employee per quarter. Eligible wages include both salary and certain health benefits, as well as employer contributions to retirement plans.
Small businesses can take full advantage of the ERTC by carefully reviewing their payroll records and identifying all eligible employees and wages. It’s worth noting that businesses can only claim the credit for wages paid after March 12, 2020, and before January 1, 2022.
To claim the credit, eligible businesses must file a Form 941, the quarterly tax return that reports employee wages and taxes withheld, and attach the necessary documentation to demonstrate eligibility for the credit. They may also choose to reduce their payroll tax deposits to account for the anticipated credit, or file Form 7200 to request an advance payment of the credit.
Small businesses that take advantage of the ERTC can receive a significant financial boost, as the credit can help offset the costs of retaining employees during a challenging economic environment. It’s a valuable resource that all eligible businesses should consider exploring, as it can help provide a much-needed payday during tough times.