Unraveling the employee retention credit: Are You Eligible?
The COVID-19 pandemic has disrupted businesses across various industries, resulting in significant financial losses and difficulty in retaining employees. To support struggling businesses and encourage employee retention, the federal government introduced the employee retention credit (ERC) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, understanding the intricacies of this credit can be challenging. In this article, we will unravel the employee retention credit and determine if your business is eligible.
What is the employee retention credit?
The employee retention credit is a refundable tax credit designed to provide financial relief to businesses that retain and pay their employees during the pandemic. The primary goal of the ERC is to incentivize employers to keep their workforce intact, despite financial hardships caused by COVID-19.
Eligibility Criteria for the employee retention credit
To determine if your business is eligible for the employee retention credit, several factors need to be considered:
1. Business Operations: The ERC is available to both for-profit and nonprofit organizations. However, government entities and small businesses who availed themselves of the Paycheck Protection Program (PPP) loans are ineligible for the ERC.
2. Business Size: The eligibility criteria vary depending on the number of full-time employees you have. If your average number of full-time employees was less than 500 in 2019, you meet the eligibility requirement.
3. Financial Hardship: You must show that your business has experienced a significant decline in gross receipts due to the pandemic. For 2020, if your gross receipts reduced by more than 50% compared to the same quarter in 2019, you qualify for the credit. Additionally, businesses that were partially or entirely suspended due to government orders are also eligible.
Calculating the employee retention credit
The calculation of the employee retention credit involves several components, including the period of eligibility, qualified wages, and the maximum credit amount. Here’s a breakdown:
1. Period of Eligibility: For 2020, the ERC applies to qualifying wages paid between March 12, 2020, and December 31, 2020. However, for 2021, the period of eligibility was extended until June 30, 2021.
2. Qualified Wages: The ERC can be claimed for up to 50% of qualified wages paid to eligible employees. For 2020, the maximum credit is $5,000 per employee, while for 2021, the maximum credit is $7,000 per employee per quarter.
3. Interaction with Payroll Taxes: Initially, the ERC was not available to businesses that received PPP loans. However, the Consolidated Appropriations Act, 2021, amended the ERC, allowing businesses that received PPP loans to qualify for the credit. Moreover, it is important to note that the ERC is fully refundable, meaning the credit can result in a cash refund.
How to Claim the employee retention credit?
To claim the employee retention credit, businesses have two options. They can either offset their payroll tax liability by reducing or eliminating their federal payroll taxes, or they can request an advance payment of the credit through Form 7200.
It is essential to consult with a qualified tax advisor or accountant to ensure that you are properly calculating and claiming the employee retention credit. They will help you navigate the complexities of the credit and ensure compliance with all applicable rules and regulations.
Final Thoughts
The employee retention credit is a valuable resource that can provide substantial financial relief to businesses struggling to retain employees during the COVID-19 pandemic. By understanding the eligibility criteria and correctly calculating the credit, your business can take advantage of this opportunity for financial assistance. Be sure to seek professional guidance in navigating this credit to maximize its benefits for your organization.