The employee retention tax credit (ERTC) is a tax credit that can be claimed by eligible employers who retained their employees during the challenging times of the COVID-19 pandemic. An extension of the federal stimulus package, this credit is aimed at helping small to medium-sized businesses stay afloat by incentivizing them to retain their employees. However, many employers are still unsure about how to unlock the benefits of the ERTC. In this step-by-step guide, we’ll take you through the process of claiming the ERTC, and how you can best utilize this credit to boost your business.
Step 1: Determine Eligibility
Before you can claim the ERTC, it’s important to determine if your business is eligible for the credit. To be eligible, your business must have experienced a significant decline in revenue or had to partially or fully suspend operations due to government restrictions related to the COVID-19 pandemic. Additionally, your business must have fewer than 500 employees, among other eligibility requirements. You can check the full list of eligibility requirements on the IRS website.
Step 2: Calculate the credit
The ERTC is calculated as 50% of up to $10,000 in qualified wages paid to each eligible employee between March 13, 2020, and December 31, 2021. Essentially, the maximum credit per employee is $5,000. Qualified wages include wages paid to an employee during a period in which the employer met the eligibility requirements for the credit. It’s important to remember that the credit cannot exceed the employer’s portion of Social Security taxes owed on all wages for all employees for the same period.
Step 3: Claim the credit
Once you have determined eligibility and calculated the credit, you can claim the ERTC. Businesses can claim the credit by filing Form 941, Employer’s Quarterly Federal tax Return. Employers can claim the credit against the employer portion of Social Security taxes that would otherwise be deposited with the IRS. If the credit exceeds the employer’s Social Security tax liability, the excess credit is refundable, which can provide an immediate cash infusion for businesses.
Step 4: Use the credit to Boost Your Business
Now that you have successfully claimed the ERTC, it’s time to use the credit to boost your business. The credit can be used to cover payroll costs, including wages and health benefits. Employers can also use the credit to invest in other areas of their business, such as training and development programs for employees, purchasing new equipment, or expanding their product line. Utilizing the ERTC in this way can help businesses improve their operations and position themselves for future growth.
In conclusion, the ERTC is a valuable tool for businesses looking to retain their employees during these challenging times. By following these four steps, businesses can unlock the benefits of the ERTC and utilize the credit to not only retain their employees but also to invest in their business and position themselves for future growth. If you’re unsure about your eligibility or how to claim the credit, consult a tax professional who can guide you through the process.