For small businesses struggling to keep their doors open during these challenging times, every bit of financial relief is crucial. One such lifeline is the employee retention credit (ERC), a tax credit introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The ERC is designed to incentivize businesses to keep employees on their payroll, providing them with the much-needed cash flow to stay afloat. However, many small business owners remain unaware of this credit and are missing out on potential benefits. In this article, we will explore how small businesses can unlock the benefits of the employee retention credit.
The employee retention credit is a refundable tax credit that allows eligible employers to claim up to 70% of qualified wages paid to employees. This credit applies to wages paid between March 13, 2020, and December 31, 2021, making it a valuable long-term relief option for small businesses affected by the pandemic.
Who can claim the credit?
To claim the ERC, a business must meet specific criteria. Firstly, the business must have experienced either a full or partial suspension of operations due to a government order limiting commerce, travel, or group meetings. Alternatively, they must have experienced a significant decline in gross receipts.
For businesses with an average of 500 or fewer full-time employees in 2019, all wages paid during the suspension or decline in gross receipts period can be considered for the credit. Larger employers can only claim the credit for wages paid to employees who were not providing services during the suspension or decline.
2. Calculate qualified wages: Identify your eligible employees and calculate the qualified wages paid during the applicable periods. Qualified wages include salary and certain health benefits but exclude those covered by the Paycheck Protection Program (PPP) forgivable loan.
3. Review payroll tax requirements: Understand how to claim the credit against your payroll taxes. The credit can be claimed by reducing the employer’s portion of Social Security taxes on Form 941 or by requesting an advance payment on Form 7200.
4. Keep documentation: Maintain thorough records of eligibility determinations, qualified wages calculations, and any other paperwork required to support your claim. This will help you during any potential IRS audit or review.
Unlocking the benefits of the employee retention credit can provide a much-needed financial boost for small businesses. By claiming this credit, eligible businesses can reduce their tax liability, free up cash flow, and mitigate the financial strain caused by the pandemic.
Furthermore, for businesses that received PPP loans, it’s important to note that claiming the employee retention credit does not disqualify them from loan forgiveness. However, qualified wages used to claim the credit cannot overlap with wages used for PPP loan forgiveness calculations.
As small businesses face unprecedented challenges during the ongoing pandemic, it is essential to explore all available options for financial relief. The employee retention credit offers a lifeline for eligible businesses, providing a valuable tax credit to help maintain payroll and keep employees on board.
By understanding the eligibility requirements, calculating qualified wages, and following the proper procedures, small business owners can unlock the benefits of the employee retention credit and pave the way for a more stable future. Seek professional guidance to ensure you make the most of this valuable opportunity and keep your business afloat during these turbulent times.