The employee retention tax credit (ERTC) was introduced in 2020 as part of the CARES Act to incentivize businesses to retain their employees during the COVID-19 pandemic. However, many businesses are still unaware of this tax credit, and how they can qualify and claim it.
So, what is the ERTC? It is a refundable tax credit that allows eligible businesses to claim up to $5,000 per employee for wages paid between March 13, 2020, and January 1, 2021. The credit can be claimed for up to 50% of wages paid to employees who are still working, but whose hours have been reduced, or they are unable to work due to government orders or lack of business caused by COVID-19.
Qualifying for the ERTC might seem complicated, but it mainly depends on two factors: the size of your business and how much your revenue has been affected by the pandemic.
For businesses with 100 or fewer employees, all wages paid during the qualifying period are eligible for the credit, regardless of whether the employees are working. For businesses with more than 100 employees, only wages paid to employees who are not working are eligible for the credit.
In terms of revenue, businesses must either have had their operations fully or partially suspended due to a government order related to COVID-19, or they must have experienced a significant decline in gross receipts. A significant decline is defined as a 50% decline in gross receipts for any quarter in 2020 compared to the same quarter in 2019.
To claim the credit, businesses can use Form 941, Employer’s Quarterly Federal tax Return. They can claim the credit against their payroll tax deposits, or they can request an advance payment of the credit through Form 7200, Advance Payment of Employer Credits Due to COVID-19.
It’s important to note that businesses cannot claim both the ERTC and the Paycheck Protection Program (PPP) loan. However, if a business received a PPP loan, but not loan forgiveness, they may still be eligible for the ERTC.
The ERTC is a valuable tax credit that can help businesses offset the cost of retaining their employees during a challenging economic climate. If you believe your business qualifies for the ERTC, it’s advisable to consult with a tax professional or accountant to ensure you claim the credit correctly and maximize its benefits.