The employee retention tax credit (ERTC) is a provision under the CARES Act that aims to provide employers with financial assistance to retain their employees during the COVID-19 pandemic. This credit is designed to help businesses whose operations were significantly impacted by government-mandated shutdowns or those who experienced a significant reduction in gross receipts due to the pandemic.
To qualify for the ERTC, certain criteria must be met by the employers. Here are some of the qualifications an employer must meet to claim the credit:
Eligible employer
Only eligible employers can claim the ERTC. This includes businesses, including tax-exempt organizations, that maintained operations during the COVID-19 crisis or had to shut down their operations wholly or partially due to the government’s order. The credit is not available for any governmental organizations or entities established under state or local law.
Reduction in gross receipts
Eligible employers must show a significant decline in their gross receipts during a calendar quarter compared to the same quarter in the previous year. Under the CARES Act, a significant decline is defined as a decrease of at least 50% in gross receipts for the same quarter in 2019. Once the decline is met, the employer becomes eligible to claim the ERTC for all quarters until its gross receipts go beyond 80% of the gross receipts of the same quarter in the previous year.
Full or partial suspension of operations
For an eligible employer to claim the ERTC, it must also demonstrate full or partial suspension of its operations. Full suspension is defined as a business that had to shut down operations entirely as per the government’s order, while partial suspension applies to businesses that had to reduce their operations’ normal working hours by 50% or more due to the pandemic.
Qualified wages
The ERTC provides for a tax credit of 50% of up to $10,000 of qualified wages per employee. Qualified wages include all wages and salaries paid or incurred between March 13, 2020, and December 31, 2020, to employees who work 30 hours or more per week or part-time employees who work on average 30 hours or less per week. The credit is not available for employees who received Paycheck Protection Program (PPP) loans.
Conclusion
Qualifying for the employee retention tax credit is crucial for employers who want to continue operating during the pandemic. By understanding the criteria for eligibility, employers can determine if they qualify for the credit and ensure that they take the necessary steps to claim it. It’s advisable to seek the guidance of a tax professional to ensure proper documentation and adherence to IRS guidelines.