Eligibility Criteria for Business Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was created to help businesses keep employees on payroll during the pandemic. The ERTC can be claimed by eligible employers that experienced a significant decline in gross receipts or were fully or partially suspended due to a government order. It is important for businesses to understand the eligibility criteria to determine if they qualify for this tax credit.
1. Businesses that are eligible for the tax credit
To be eligible for the ERTC, businesses must meet certain criteria. According to the U.S. Chamber of Commerce, eligible employers are those that:
- Were ordered to fully or partially suspend operations due to a COVID-19-related government order, or
- Experienced a significant decline in gross receipts.
2. Employees that are eligible for the tax credit
The ERTC is available for wages paid from March 13, 2020, through December 31, 2021. The tax credit is available to employers that continue to pay wages to employees during a qualifying period. According to the IRS, eligible employees are those who:
- Worked for the employer during the qualifying period, and
- Did not perform services for the employer due to a full or partial suspension of operations or a significant decline in gross receipts.
Qualified wages include the cost of employer-provided health care, but do not include wages that have been used to calculate other tax credits, such as the Paid Sick Leave Credit or the Paid Family Leave Credit.
To calculate the tax credit, eligible employers can claim up to 70% of qualified wages paid to employees, up to $10,000 per employee per quarter in 2021. This means that the maximum credit per employee for all four quarters in 2021 is $28,000.
Benefits of Business Employee Retention Tax Credit
The ERTC is a valuable tax credit that can provide financial relief to businesses that have been impacted by the pandemic. Here are some of the key benefits of the ERTC.
1. Maximum credit amount
According to the Treasury Department, eligible employers can claim up to $7,000 per employee per quarter in 2021, which means that the maximum credit per employee for all four quarters in 2021 is $28,000. This is a significant amount of money that can help businesses keep their employees on payroll.
2. Retroactive claims
Businesses that were eligible for the ERTC in 2020 can now claim the tax credit retroactively. According to Lendio, businesses have until April 2024 to amend their tax filings for 2020 and claim the ERTC. This means that businesses can receive financial relief for wages paid to employees in 2020.
3. Refundable tax credit
The ERTC is a refundable tax credit, which means that businesses can receive a refund for any excess credit that they are unable to use to offset payroll taxes. According to the U.S. Chamber of Commerce, businesses can claim the ERTC on their quarterly tax returns by reporting their qualified wages and related health insurance costs.
It is important for businesses to understand the benefits of the ERTC and how it can help them keep their employees on payroll. The next section will provide information on how to claim the ERTC.
How to Claim Business Employee Retention Tax Credit
Now that you understand the eligibility criteria and benefits of the ERTC, it is important to know how to claim the tax credit. Here are the steps that businesses need to take to claim the ERTC.
1. Steps to claim the tax credit
According to the U.S. Chamber of Commerce, businesses can claim the ERTC by following these steps:
- Identify the qualifying quarters: Determine which quarters in 2020 and/or 2021 you are eligible for the ERTC.
- Calculate the qualified wages: Calculate the qualified wages for each employee for the qualifying quarters.
- Calculate the credit: Calculate the amount of the credit for each qualifying employee.
- Report the credit: Report the credit on your quarterly tax returns by filing Form 941.
- Claim the credit: Claim the credit by reducing your payroll tax deposits or requesting a refund.
2. Documentation required to claim the tax credit
According to the IRS, businesses must maintain proper documentation to claim the ERTC. This documentation includes:
- Records of gross receipts: Businesses must maintain records of their gross receipts to determine if they qualify for the ERTC.
- Records of employee wages: Businesses must maintain records of their employee wages to determine the amount of the credit.
- Documentation of the suspension of operations: If a business was fully or partially suspended due to a COVID-19-related government order, they must maintain documentation of the order.
- Documentation of the decline in gross receipts: If a business experienced a significant decline in gross receipts, they must maintain documentation of the decline.
3. Common mistakes to avoid when claiming the tax credit
According to SnackNation, there are some common mistakes that businesses should avoid when claiming the ERTC. These mistakes include:
- Failing to properly calculate the credit: It is important to accurately calculate the credit for each qualifying employee.
- Failing to maintain proper documentation: Businesses must maintain proper documentation to support their claim for the ERTC.
- Failing to claim the credit: Some businesses may not be aware that they are eligible for the ERTC and may fail to claim the credit on their tax returns.
It is important for businesses to avoid these mistakes to ensure that they receive the full benefit of the ERTC.
Other Considerations for Business Employee Retention Tax Credit
While the ERTC can be a valuable resource for businesses impacted by the pandemic, there are other considerations that businesses should keep in mind when claiming the tax credit.
1. Interaction with other tax credits
According to the IRS, businesses cannot claim the ERTC for wages that have been used to calculate other tax credits, such as the Paid Sick Leave Credit or the Paid Family Leave Credit. Businesses should carefully review their tax filings to ensure that they are not double-dipping on tax credits.
2. Interaction with PPP loans
Businesses that received Paycheck Protection Program (PPP) loans can still claim the ERTC. However, they cannot claim the ERTC for wages that were paid with PPP funds. According to Lendio, businesses can claim the ERTC for wages paid that exceed the amount of PPP funds used for payroll.
3. Interaction with state tax credits
Some states have their own tax credits for businesses impacted by the pandemic. According to SnackNation, businesses should review their state's tax code to determine if they are eligible for any state tax credits in addition to the ERTC.
4. Third-party advice
According to the IRS, businesses should be cautious of third-party advice regarding the ERTC. Some third-party advisors may provide incorrect or misleading information about the tax credit, which could result in penalties or fines for businesses.
5. Penalty relief
The IRS has provided penalty relief for businesses that claim the ERTC on their tax returns. According to the IRS, penalty relief is available for businesses that:
- Claim the ERTC in good faith, and
- Have a reasonable basis for claiming the credit.
It is important for businesses to understand these considerations when claiming the ERTC to ensure that they are in compliance with all tax laws and regulations.
Get the Help You Need with Business Employee Retention Tax Credit
The ERTC can be a complex tax credit, and businesses may need help navigating the eligibility criteria, documentation requirements, and other considerations. Here are some resources that businesses can use to get the help they need with the ERTC.
1. IRS guidance
The IRS provides guidance on the ERTC, including eligibility criteria, documentation requirements, and how to claim the tax credit. Businesses can review the IRS guidance to get a better understanding of the ERTC and how it can help them keep their employees on payroll.
2. Third-party advisors
While businesses should be cautious of third-party advice regarding the ERTC, there are reputable third-party advisors that can help businesses navigate the tax credit. According to SnackNation, businesses should look for advisors that have experience with the ERTC and can provide references from other businesses that they have helped.
3. Professional associations
Professional associations, such as the U.S. Chamber of Commerce, can provide guidance and resources to businesses regarding the ERTC. These associations may also offer webinars or other training sessions to help businesses understand the tax credit.
4. Check out our other great content
We hope that this article has been helpful in providing information on the ERTC and how it can benefit businesses impacted by the pandemic. Be sure to check out our other great content for more information on business finance, tax credits, and other topics that can help your business succeed.
Remember, the ERTC can provide valuable financial relief to businesses impacted by the pandemic. By understanding the eligibility criteria, documentation requirements, and other considerations, businesses can claim the tax credit and keep their employees on payroll.
Frequently Asked Questions
Q: Who is eligible for the business employee retention tax credit?
A: Eligible businesses include those that experienced a decline in gross receipts or were fully or partially suspended due to COVID-19.
Q: What is the maximum benefit for the business employee retention tax credit?
A: The maximum benefit is $28,000 per employee for the full year of 2021.
Q: How can businesses claim the business employee retention tax credit?
A: Businesses can claim the tax credit on their quarterly tax returns using Form 941.
Q: What are qualified wages for the business employee retention tax credit?
A: Qualified wages include wages paid to employees during the pandemic or while the business was fully or partially suspended.
Q: How does the business employee retention tax credit interact with PPP loans?
A: Businesses that received PPP loans can still claim the tax credit, but not for wages paid with PPP funds.
Q: What if a business receives conflicting advice about the business employee retention tax credit?
A: Businesses should be cautious of third-party advice and consult the IRS guidance or a reputable third-party advisor for clarification.
