Employee Retention Credit (ERC) is a critical financial support mechanism designed to help businesses navigate the financial challenges posed by the COVID-19 pandemic. This tax relief measure offers significant benefits to employers, enabling them to retain their employees during periods of economic hardship. This article will delve into the intricacies of the Employee Retention Credit, outlining what it entails, how to claim it, and the qualifications required to benefit from this crucial program.
What is Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit against certain employment taxes. Introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, ERC aims to encourage employers to keep their employees on the payroll amidst the financial instability caused by the COVID-19 pandemic.
The ERC allows eligible employers to claim a certain percentage of wages paid to their employees. For 2020, employers could claim 50% of up to $10,000 in wages paid per employee. However, for 2021, this was increased to 70% of up to $10,000 in wages paid per employee per quarter. The maximum credit an employer can claim in 2021 is $28,000 per employee.
How to Claim Employee Retention Credit
The process of claiming the Employee Retention Credit involves several steps. Firstly, employers must determine their eligibility based on the set criteria. This includes having a significant decline in gross receipts or experiencing a partial or full suspension of operations due to government orders related to COVID-19.
Secondly, eligible employers can claim the ERC by reporting their total qualified wages and any related health insurance costs on their quarterly employment tax return, filed using Form 941. If the employer’s employment tax deposits are not sufficient to cover the credit, they may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Employers may also claim the credit for any qualifying wages paid since the start of the pandemic by adjusting their employment tax returns.
Employee Retention Credit Qualifications
There are specific qualifications that employers must meet to be eligible for the ERC. These qualifications are divided into two categories: operations and gross receipts.
For the operational test, employers qualify if the operation of their trade or business was either fully or partially suspended during any calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19.
The gross receipts test, on the other hand, requires employers to show that their gross receipts are below a certain threshold. For 2020, employers qualify if their gross receipts for any quarter were less than 50% of the same quarter in 2019. For 2021, employers qualify if their gross receipts for any quarter are less than 80% of the same quarter in 2019.
It’s important to note that the ERC is available to employers of all sizes, including tax-exempt organizations. However, there are exceptions for federal, state, and local government entities and businesses receiving Paycheck Protection Program loans.
The Employee Retention Credit, introduced as part of the CARES Act, is a vital tool for businesses striving to maintain their workforce amidst economic uncertainty. By understanding the nature of the ERC, the process of claiming it, and the qualifications for eligibility, employers can take full advantage of this financial support to navigate the stormy economic waters brought on by the COVID-19 pandemic. It is advisable for employers to consult with a tax professional to ensure they are maximizing their benefit from the ERC and complying with all related requirements.
