Understanding the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a refundable tax credit created by the U.S. government to assist businesses that have been impacted by the COVID-19 pandemic. The tax credit is designed to encourage employers to keep their employees on the payroll, even if business has slowed down. In this section, we will explore what the ERTC is, why it is important for businesses to claim it, and what the article will cover.
What is the Employee Retention Tax Credit?
The ERTC is a tax credit that eligible employers can claim on their federal employment tax returns. The credit is equal to 70 percent of the qualified wages that an eligible employer paid to employees during a designated period. The maximum credit amount is $7,000 per employee, per quarter, for a total of $28,000 per employee for all four quarters of 2021.
Why is it important for businesses to claim the Employee Retention Tax Credit?
The pandemic has caused many businesses to suffer significant financial losses, which have made it difficult to keep employees on the payroll. The ERTC provides a valuable incentive for businesses to retain employees, even if business is slow. Claiming the ERTC can help businesses save money on their taxes, which can free up funds to invest in other aspects of their operations.
Overview of What this Article Will Cover
In the next section, we will discuss the eligibility criteria for businesses to claim the ERTC. We will also cover how businesses can determine the amount of credit they can claim, and provide examples of businesses that qualify for the credit.
Qualifying for the Employee Retention Tax Credit
To claim the Employee Retention Tax Credit (ERTC), businesses must meet certain eligibility criteria. In this section, we will cover the requirements for businesses to qualify for the credit, how to determine the amount of credit a business can claim, and provide examples of businesses that are eligible.
Eligibility Criteria for Businesses
To qualify for the ERTC, businesses must meet the following criteria:
- The business must have been fully or partially suspended as a result of a government order related to COVID-19, OR
- The business must have experienced a significant decline in gross receipts. According to the Internal Revenue Service (IRS), a significant decline in gross receipts means that a business has experienced a decline of 20 percent or more in gross receipts during a calendar quarter compared to the same quarter in 2019.
Determining the Amount of Credit a Business Can Claim
The amount of credit that a business can claim is based on the qualified wages that the business paid to employees during a designated period. The qualified wages include both cash compensation and certain health plan expenses. The maximum credit amount is $7,000 per employee, per quarter, for a total of $28,000 per employee for all four quarters of 2021.
Examples of Eligible Businesses
Businesses that meet the eligibility criteria for the ERTC include:
- Businesses that were ordered to shut down by the government due to the pandemic
- Businesses that had to reduce their hours of operation due to the pandemic
- Businesses that experienced a significant decline in gross receipts due to the pandemic, according to the U.S. Chamber of Commerce.
In the next section, we will discuss how businesses can claim the ERTC on their tax return and the filing requirements and deadlines.
Claiming the Employee Retention Tax Credit
In this section, we will discuss how businesses can claim the Employee Retention Tax Credit (ERTC) on their tax return, the filing requirements, and the penalties for claiming the credit incorrectly.
How to Claim the ERTC on Your Tax Return
To claim the ERTC on your tax return, eligible employers can use Form 941, Employer's Quarterly Federal Tax Return. The credit is claimed on Line 11c of Form 941. If the credit exceeds the employer's share of social security tax, the excess credit is treated as an overpayment and refunded to the employer.
Filing Requirements and Deadlines
The deadline for filing Form 941 to claim the ERTC is the last day of the month following the end of the quarter. For example, the deadline for filing Form 941 for the first quarter of 2021 (January – March) was April 30, 2021.
If a business missed the deadline to claim the ERTC, they can file an amended Form 941-X for each quarter they paid qualifying wages. According to Paychex, businesses can retroactively claim the ERTC until 2024 or 2025 by conducting a lookback on their payroll during the pandemic and filing an amended tax return.
Penalties for Claiming the Credit Incorrectly
The IRS has warned businesses to be cautious of third-party advice when claiming the ERTC. If a business claims the credit incorrectly, they may be subject to penalties and interest charges. However, the IRS has provided penalty relief for claims related to the ERTC.
In the next section, we will discuss the benefits of the ERTC and provide real-world examples of businesses that have benefited from the credit.
Benefits of the Employee Retention Tax Credit
In this section, we will discuss the benefits of the Employee Retention Tax Credit (ERTC) for businesses and provide real-world examples of businesses that have benefited from the credit.
Benefits of the ERTC
The ERTC provides eligible businesses with a refundable tax credit for wages paid to employees during the pandemic. The credit is designed to help businesses retain their employees and stay afloat during the economic downturn caused by the pandemic.
Some of the benefits of the ERTC for eligible businesses include:
- A refundable tax credit of up to $7,000 per employee, per quarter, for a total of $28,000 per employee for all four quarters of 2021.
- The ability to claim the credit retroactively by filing an amended tax return.
- The credit can be claimed on both cash compensation and certain health plan expenses.
- The credit can be claimed by businesses that received Paycheck Protection Program (PPP) loans, as long as they did not use the same wages for both the ERTC and PPP loan forgiveness.
Real-World Examples of Businesses Benefiting from the ERTC
Many businesses have already benefited from the ERTC. Here are some real-world examples:
- A small restaurant in Maryland was able to keep all of its employees on the payroll and avoid layoffs thanks to the ERTC. The owner of the restaurant told Lendio that the credit helped them cover their payroll costs during a difficult time.
- A manufacturing company in Ohio was able to claim the ERTC for a total of $600,000, which helped them keep their employees on the payroll and avoid layoffs. The company's CEO told KBKG that the credit was a lifeline for their business.
- A dental practice in Texas was able to claim the ERTC for a total of $30,000, which helped them cover their payroll costs and keep their employees on the payroll. The practice's owner told Paychex that the credit was a great help during a difficult time.
In the next section, we will discuss some common misconceptions about the ERTC and provide clarity on some of the frequently asked questions about the credit.
Common Misconceptions About the Employee Retention Tax Credit
In this section, we will discuss some common misconceptions about the Employee Retention Tax Credit (ERTC) and provide clarity on some of the frequently asked questions about the credit.
Misconception #1: Businesses That Received PPP Loans Cannot Claim the ERTC
One common misconception about the ERTC is that businesses that received Paycheck Protection Program (PPP) loans cannot claim the credit. However, this is not true. According to Paychex, businesses that received PPP loans can claim the ERTC as long as they did not use the same wages for both the ERTC and PPP loan forgiveness.
Misconception #2: Businesses That Are No Longer Operating Cannot Claim the ERTC
Another misconception about the ERTC is that businesses that are no longer operating cannot claim the credit. However, this is not true either. According to the U.S. Chamber of Commerce, eligible businesses can claim the ERTC for wages paid up until the date that they ceased operations.
Misconception #3: The ERTC is Only Available to Small Businesses
While the ERTC is designed to help small businesses, it is not limited to small businesses. According to the IRS, businesses of all sizes are eligible for the credit as long as they meet the eligibility criteria.
Misconception #4: The ERTC Can Only Be Claimed for Wages Paid During the Pandemic
Another common misconception about the ERTC is that it can only be claimed for wages paid during the pandemic. However, according to KBKG, the credit can be claimed for wages paid from March 13, 2020, through September 30, 2021, even if the wages were paid after the pandemic.
Misconception #5: The ERTC is Not Worth the Effort
Some businesses may believe that the ERTC is not worth the effort of claiming it. However, this is not true. According to Lendio, the ERTC can provide businesses with a significant amount of tax relief, which can help them stay afloat during a difficult time.
In the final section, we will summarize the key points of the article and provide some final thoughts on the ERTC.
The Employee Retention Tax Credit: Final Thoughts.
In this article, we have discussed the Employee Retention Tax Credit (ERTC), including how businesses can claim the credit on their tax return, the filing requirements and deadlines, the penalties for claiming the credit incorrectly, the advantages of the credit, some real-world examples of businesses that have benefited from the credit and some common misconceptions about the credit.
The ERTC offers eligible businesses a sizable amount of tax relief, which can aid them in surviving during a trying time. We advise you to speak with your accountant or tax specialist to find out if you qualify for the ERTC if you are a business owner who has been impacted by the pandemic.
I appreciate you taking the time to read this. Check out our other excellent content on tax credits and business finance if you found this information useful.
Keep in mind that the ERTC can offer your company a lifeline during a trying time. Don't pass up this chance to receive crucial tax relief.
Common Questions
Who is eligible for the tax credit for employee retention?
Eligible businesses that paid wages during the pandemic or had significant losses.
What is the maximum amount of tax credit for employee retention?
Up to $7,000 per employee, per quarter, for a total of $28,000 per employee for all four quarters of 2021.
How can businesses claim the tax credit for employee retention?
By claiming the credit on their tax return or filing an amended tax return.
What is the deadline for filing the tax credit for employee retention?
April 2024 for 2020 tax filings and April 2025 for 2021 filings.
How does the tax credit for employee retention differ from the PPP loan?
The ERTC is a refundable tax credit, while the PPP loan is a forgivable loan.
What if my business already received a PPP loan, can I still claim the ERTC?
Yes, businesses that received PPP loans can still claim the ERTC as long as they did not use the same wages for both the ERTC and PPP loan forgiveness.
