In the wake of the COVID-19 pandemic, businesses of all sizes have been struggling to keep their doors open. Small businesses, in particular, have been hit hard by the economic downturn, and many have had to lay off employees or close altogether. To help businesses stay afloat and retain their employees, the federal government introduced the Employee Retention Tax Credit (ERTC).
In this article, we’ll go over everything you need to know about the ERTC, including what it is, who is eligible, how to claim it, and more. By the end of this article, you’ll have a solid understanding of the ERTC and how it can help your business weather the storm. (Learn how to Calculate the Employee Retention Tax Credit)
What is the Employee Retention Tax Credit (ERTC)?
The Employee Retention Tax Credit is a refundable tax credit that was introduced as part of the CARES Act in March 2020. The purpose of the credit is to encourage businesses to keep their employees on the payroll, even during times of economic hardship. The credit is worth up to $5,000 per employee for the 2020 tax year and up to $7,000 per employee for the first two quarters of 2021.
Who is Eligible for the Employee Retention Tax Credit?
To be eligible for the ERTC, a business must meet one of two criteria:
- The business had to fully or partially suspend operations during any quarter of 2020 or 2021 due to government orders related to COVID-19, OR
- The business had a significant decline in gross receipts during any quarter of 2020 or 2021 compared to the same quarter in 2019.
For businesses with more than 100 employees, the credit is only available for wages paid to employees who were not working due to a suspension of operations or a decline in gross receipts. For businesses with 100 or fewer employees, the credit is available for all wages paid during the eligible period.
How to Claim the Employee Retention Tax Credit
To claim the ERTC, businesses must fill out Form 941, the employer’s quarterly federal tax return. The credit can be claimed on the Form 941 for the quarter in which the eligible wages were paid. If the amount of the credit exceeds the amount of payroll taxes owed, the excess can be refunded to the business.
It’s important to note that businesses cannot claim the ERTC and the Paycheck Protection Program (PPP) loan forgiveness for the same wages. If a business received a PPP loan, they can still claim the ERTC for wages that were not forgiven under the PPP.
Potential Impact of the Employee Retention Tax Credit
The ERTC can have a significant impact on a business’s bottom line, especially for small businesses. By taking advantage of the credit, businesses can reduce their tax liability and potentially receive a refund, which can be used to cover other business expenses.
In addition, the ERTC can help businesses retain their employees during times of economic hardship. By keeping employees on the payroll, businesses can ensure that they are ready to ramp up operations when the economy bounces back.