If your business was impacted by the COVID-19 pandemic, you might qualify for the employee retention tax credit (ERTC). This refundable tax credit can be worth up to $26,000 per employee.
To claim the credit, you must prove that your business was impacted by the pandemic and paid employees during that time. The credit is equal to 50% of the qualifying wages paid to eligible employees, up to $10,000 each quarter.
Eligibility
ERC eligibility is determined based on two factors: the amount of your business’s decline in gross receipts and your total number of employees. Employers can claim the credit for wages paid during a qualifying period, up to $10,000 per employee.
The credit is available to businesses and nonprofits that either had to temporarily suspend operations or reduced their gross receipts due to a COVID-19 governmental order. The credit is 50% of up to $10,000 of qualifying wages paid to eligible employees for each quarter.
A small employer, defined as one that averaged less than 500 full-time employees in 2019, is eligible to claim the credit. A small employer may include any related entities when counting its total number of employees for aggregation purposes.
Calculation
Calculating your employee retention tax credit (ERC) is essential to ensure that you are maximizing the impact of this valuable tax credit within your business. A properly calculated amount will allow you to evaluate several employer-sponsored strategies and maximize your return on investment in this crucial area of your operations.
To calculate ERC, you must first determine the number of eligible employees and the total amount of qualified wages paid to those employees during the applicable quarter. The credit equals 50% of qualifying wages up to $10,000 per employee.
The credit can be used to reduce a company’s portion of its Social Security taxes and is entirely refundable. This means that if the credit exceeds your total Social Security liability in almost any quarter, the excess will be refunded to you.
The employee retention credit was established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is a complex program, so it is important to work with a professional tax expert to help you determine which tax credits your business should apply its qualified wages toward.
Filing
The employee retention tax credit is a refundable credit that eligible employers can claim against employment taxes paid in the credit-generating period. This credit is meant to encourage business owners to continue paying their employees during the COVID-19 pandemic.
This credit was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES), enacted in March 2020. It is retroactively effective for wages paid between March 12, 2020 and September 30, 2021.
In order to qualify for the ERC, an employer must have experienced a full or partial shutdown due to a COVID-19-related mandate, or must have had a significant decrease in gross receipts as a result of the pandemic.
Because this tax credit is a retroactive benefit, an eligible employer must file an amended Form 941 X for the applicable quarters in which qualified wages were paid. This form is available on the IRS website.
Refunds
For businesses that lost wages and revenue during the COVID-19 pandemic, the employee retention tax credit was a reassurance that their business would not be shut down. Eligible companies received as much as $26,000 per employee through this relief program.
Many business owners are unaware that they can still claim their ERTC refunds retroactively. They can do this by filing Form 941-X within three years of the original return or two years from the date they paid the tax.
To qualify, employers must be able to provide documentation of qualified wages. This includes any wages paid to employees on family leave, vacation or sick pay. The IRS has issued guidelines for this credit which are subject to change.
While this credit can be a great way to help struggling businesses, it is important to note that some aspects of the program are complex. You need a qualified tax professional to guide you through the process and maximize your refund.
Many companies may advertise $26,000 per employee in a claim for the ERC. This is a highly inflated number and doesn’t always happen.
