Employee Retention Credit for Employers: What You Need to Know
The Employee Retention Credit (ERC) is a refundable tax credit available to businesses that paid employees during the pandemic or experienced significant declines in gross receipts. This credit is a lifeline for businesses struggling to keep employees on payroll. In this article, we will explore the eligibility criteria, how to claim the credit, and the benefits it offers to employers.
During the pandemic, many businesses were forced to lay off employees due to financial difficulties. The ERC was introduced as part of the CARES Act to help businesses retain their employees during these challenging times. The credit has since been extended and expanded to provide additional relief to businesses affected by the pandemic.
In the following sections, we will take a closer look at the Employee Retention Credit and how it can help businesses get through these unprecedented times.
How the Employee Retention Credit Works
The Employee Retention Credit (ERC) is a refundable tax credit designed to provide financial relief to businesses that paid employees during the pandemic or experienced significant declines in gross receipts. According to the IRS, to be eligible for the ERC, businesses must have experienced a full or partial suspension of operations due to government orders related to COVID-19, or a significant decline in gross receipts.
Qualified wages are wages paid to employees during the eligible period and are used to calculate the credit amount. Snack Nation stated that qualified wages are those paid between March 13, 2020, and December 31, 2021, for businesses that experienced a full or partial suspension of operations, and from January 1, 2021, to December 31, 2021, for businesses that experienced a significant decline in gross receipts.
The credit amount is calculated as a percentage of qualified wages paid during the eligible period. According to the US Chamber of Commerce, for the first and second quarters of 2021, the credit is equal to 70% of qualified wages, up to a maximum of $10,000 per employee per quarter. For the third and fourth quarters of 2021, the credit is equal to 50% of qualified wages, up to a maximum of $10,000 per employee per quarter.
Eligible employers can claim the credit on their employment tax returns by reporting the credit on Form 941. If the credit exceeds the employment taxes owed, the excess credit is refundable. For businesses that are not required to file employment tax returns, the credit can be claimed by filing Form 7200. According to Lendio, recovery startup businesses are also eligible for the ERC in 2021, even if they do not meet the eligibility criteria. A recovery startup business is a business that began operations after February 15, 2020, and has annual gross receipts of $1 million or less. These businesses can claim the credit up to a maximum of $50,000 per quarter, even if they did not pay qualified wages during the eligible period.
Benefits of the Employee Retention Credit for Employers
The Employee Retention Credit (ERC) offers several benefits to employers who qualify for the credit. Here are some of the most significant benefits:
Helps Businesses Retain Employees
One of the most significant benefits of the ERC is that it helps businesses retain their employees. By providing financial relief to businesses that pay their employees during the pandemic, the credit incentivizes employers to keep their employees on payroll. This has the added benefit of reducing unemployment and helping the economy recover.
Provides Financial Relief to Eligible Businesses
The ERC provides much-needed financial relief to eligible businesses. By reducing the amount of payroll taxes owed, the credit helps businesses free up cash flow and stay afloat during these challenging times. The credit is also refundable, which means that businesses can receive a refund if the credit exceeds the amount of payroll taxes owed.
Can Be Claimed Retroactively
Another significant benefit of the ERC is that it can be claimed retroactively. This means that businesses that did not claim the credit on their previous tax returns can file an amended return to claim the credit. According to Cherry Bekaert, eligible employers can claim the credit retroactively by filing Form 941-X for each quarter they paid qualifying wages.
Can Be Claimed by Businesses That Received PPP Loans
Businesses that received Paycheck Protection Program (PPP) loans are still eligible for the ERC. According to Snack Nation, the wage limit for any employee remains consistent at $10,000 per calendar quarter while also increasing their credit rate to 70%. This means that eligible employers can receive up to 70% of qualifying wages paid from March 13th to October 1, 2021, for each qualifying quarter from January 1, 2021, through June 30, 2021.
Penalty Relief is Available
The IRS has cautioned businesses to be cautious of third-party advice when claiming the ERC. However, according to the IRS, penalty relief is available for claims related to the credit. This means that businesses that make an honest mistake when claiming the credit will not be penalized.
How to Claim the Employee Retention Credit
If your business is eligible for the Employee Retention Credit (ERC), here's how you can claim the credit:
Determine Your Eligibility
The first step to claiming the ERC is to determine if your business is eligible for the credit. As mentioned earlier, businesses must have experienced a full or partial suspension of operations due to government orders related to COVID-19, or a significant decline in gross receipts, to be eligible for the credit. According to the US Chamber of Commerce must meet certain criteria to qualify.
Calculate the Credit Amount
Once you've determined that your business is eligible for the ERC, you will need to calculate the credit amount. The credit amount is calculated as a percentage of qualified wages paid during the eligible period. According to Snack Nation, for the first and second quarters of 2021, the credit is equal to 70% of qualified wages, up to a maximum of $10,000 per employee per quarter. For the third and fourth quarters of 2021, the credit is equal to 50% of qualified wages, up to a maximum of $10,000 per employee per quarter.
Claim the Credit on Your Employment Tax Return
Eligible employers can claim the ERC on their employment tax returns by reporting the credit on Form 941. If the credit exceeds the employment taxes owed, the excess credit is refundable. For businesses that are not required to file employment tax returns, the credit can be claimed by filing Form 7200.
Claim the Credit Retroactively
If you did not claim the ERC on your previous tax returns, you can file an amended return to claim the credit retroactively. According to Cherry Bekaert, eligible employers can claim the credit retroactively by filing Form 941-X for each quarter they paid qualifying wages.
Be Cautious of Third-Party Advice
The IRS has cautioned businesses to be cautious of third-party advice when claiming the ERC. According to the IRS, employers should be cautious of third-party advice, and penalty relief is available for claims related to the credit. Businesses that make an honest mistake when claiming the credit will not be penalized.
Common Misconceptions About the Employee Retention Credit
There are several common misconceptions about the Employee Retention Credit (ERC). Here are some of the most prevalent ones:
Misconception #1: If You Received a PPP Loan, You're Not Eligible for the ERC
This is not true. Businesses that received Paycheck Protection Program (PPP) loans are still eligible for the ERC. As mentioned earlier, eligible employers can receive up to 70% of qualifying wages paid from March 13th to October 1, 2021, for each qualifying quarter from January 1, 2021, through June 30, 2021. The wage limit for any employee remains consistent at $10,000 per calendar quarter while also increasing their credit rate to 70%.
Misconception #2: The ERC is Only Available for Certain Industries
This is also not true. While some industries were hit harder by the pandemic than others, the ERC is available to eligible businesses of all industries. As long as your business meets the eligibility criteria, you can claim the credit.
Misconception #3: You Can't Claim the ERC if You Received Other COVID-19 Relief Funding
This is not entirely true. While some COVID-19 relief programs are mutually exclusive, the ERC is not one of them. Businesses that received other COVID-19 relief funding, such as grants or loans, are still eligible for the ERC.
Misconception #4: You Can Claim the ERC for All Employees
This is not true. The ERC is only available for qualified wages paid to eligible employees during the eligible period. Qualified wages are used to calculate the credit amount and are subject to certain limits. According to the US Chamber of Commerce, qualified wages are wages paid to employees during the eligible period and are used to calculate the credit amount.
Misconception #5: You Can Only Claim the ERC Once
This is not true. Eligible employers can claim the ERC for each qualifying quarter from January 1, 2021, through December 31, 2021. This means that you can claim the credit for up to four quarters, depending on your eligibility and the amount of qualifying wages paid during each quarter.
Tips for Maximizing the Benefits of the Employee Retention Credit
If your business is eligible for the Employee Retention Credit (ERC), here are some tips for maximizing the benefits of the credit:
Tip #1: Keep Accurate Records
Keeping accurate records is crucial when claiming the ERC. You will need to provide documentation to support your claim, including payroll records, tax filings, and other financial documents. By keeping accurate records, you can ensure that your claim is accurate and avoid any potential issues with the IRS.
Tip #2: Consult with a Tax Professional
The ERC is a complex tax credit, and it can be challenging to navigate on your own. It's essential to consult with a tax professional who has experience with the credit and can help you maximize your benefits. A tax professional can help you determine your eligibility, calculate the credit amount, and ensure that you claim the credit correctly.
Tip #3: Be Cautious of Third-Party Advice
As mentioned earlier, the IRS has cautioned businesses to be cautious of third-party advice when claiming the ERC. It's important to do your own research and consult with a tax professional before claiming the credit. By being cautious and seeking professional advice, you can avoid potential penalties and ensure that your claim is accurate.
Tip #4: Claim the Credit Retroactively
If you didn't claim the ERC on your previous tax returns, you can file an amended return to claim the credit retroactively. This can help you maximize your benefits and receive the financial relief that you're entitled to. Make sure to consult with a tax professional before filing an amended return to ensure that you do it correctly.
Tip #5: Consider Other Relief Programs
While the ERC provides significant financial relief to eligible businesses, it's not the only relief program available. Consider other relief programs, such as the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program, to maximize your benefits and ensure that your business can survive during these challenging times.
With the Employee Retention Credit, Get the Financial Relief Your Business Deserves.
In these trying times, eligible businesses can receive significant financial relief from the Employee Retention Credit (ERC), a valuable tax credit. Businesses are eligible to receive up to 70% of qualifying wages paid from March 13 to October 1, 2021, for each qualifying quarter from January 1 through June 30, 2021.
By reporting the credit on Form 941 if your company is qualified for the ERC, you can claim it on your employment tax returns. The excess credit is refundable if it exceeds the cost of employment taxes. The credit can be claimed by filing Form 7200 for businesses that are not required to file employment tax returns.
Maintaining accurate records, speaking with a tax expert, and being cautious of third-party advice are all essential for maximizing the ERC's advantages. By doing this, you can make sure that your claim is accurate and steer clear of potential penalties.
Keep in mind that eligible businesses can apply for the ERC in addition to other relief programs. To maximize your benefits and guarantee that your company can survive during these difficult times, think about other relief programs like the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program.
The Employee Retention Credit is something I appreciate you reading. For more insightful information on tax credits, financial relief programs, and more, look through our other excellent content!
Common Questions
Q. Who is eligible for the employee retention credit?
A. Employers who paid wages during the pandemic or had significant revenue decline.
Q. What is the employee retention credit?
A. A refundable tax credit for businesses that kept employees on payroll during COVID-19.
Q. How much can employers receive from the employee retention credit?
A. Employers can receive up to 70% of qualifying wages paid from March 13th to October 1, 2021.
Q. Who can help businesses maximize their employee retention credit benefits?
A. Tax professionals can help businesses determine eligibility and accurately claim the credit.
Q. What should businesses be cautious of when claiming the employee retention credit?
A. Be cautious of third-party advice and consult with a tax professional before claiming the credit.
Q. How can businesses claim the employee retention credit?
A. Claim the credit on your employment tax returns by reporting it on Form 941 or file Form 7200 if not required to file employment tax returns.
