The employee retention credit (ERC) has been a lifeline for many employers during the COVID-19 pandemic. This refundable tax credit was introduced by the CARES Act in 2020 to help businesses retain their employees and continue operations despite the economic challenges posed by the pandemic. The ERC has since been extended and expanded in subsequent legislation, making it an important tool for employers to consider as they navigate the ongoing impacts of the pandemic.
Understanding the employee retention credit
The ERC is a tax credit that allows eligible employers to claim a percentage of qualified wages paid to employees during a specified period. The credit amount is 70% of qualified wages, up to $10,000 per employee per quarter, for a maximum credit of $7,000 per employee per quarter. This means that an employer can potentially claim up to $28,000 per employee for the entire 2021 tax year.
To be eligible for the ERC, employers must meet certain criteria, including:
Experiencing a significant decline in gross receipts (compared to a prior period) due to the pandemic, or
Facing a full or partial suspension of operations as a result of government orders related to the pandemic.
Applying for the employee retention credit
Employers can claim the ERC on their quarterly employment tax returns (Form 941) or as an advance refund by filing Form 7200. Many employers have found the process of claiming the credit to be complex and time-consuming, but the potential benefits make it worthwhile to explore. Additionally, there are opportunities to claim the credit retroactively for 2020, so it is important for employers to review their eligibility for past periods as well.
Maximizing the Benefits of the ERC
Employers can maximize the benefits of the ERC by carefully assessing their current and projected financial situation, understanding the eligibility criteria, and seeking professional guidance if needed. It is important to keep thorough records of all relevant information and documentation to support the claim for the credit. Additionally, employers should stay updated on any changes to the legislation and guidance from the IRS to ensure that they are taking full advantage of the credit.
The employee retention credit has provided much-needed financial relief for many employers during the pandemic, helping them to keep their businesses afloat and retain their workforce. As the economic landscape continues to evolve, the ERC remains a valuable resource for employers to consider as they navigate the challenges of the ongoing pandemic. By understanding and applying the ERC effectively, employers can make the most of this lifeline and continue to support their employees and business operations.