The Employee Retention Credit (ERC) is a tax credit designed to help businesses that have been affected by the COVID-19 pandemic. It is intended to provide financial relief to businesses that have had to suspend operations or have experienced a significant decline in gross receipts due to the pandemic.
To be eligible for the ERC, a business must meet one of the following two criteria:
- Suspension of operations: The business must have been fully or partially suspended due to a COVID-19 related government order. This includes orders that limit the business’s ability to operate, such as stay-at-home orders or capacity restrictions.
- Significant decline in gross receipts: The business must have experienced a significant decline in gross receipts, defined as a year-over-year decline of more than 50%. For example, if a business’s gross receipts in March 2021 were more than 50% lower than they were in March 2020, the business would meet this criterion.
If a business meets one of these criteria, it is eligible to claim the ERC. The credit is equal to 50% of qualified wages (up to $10,000 per employee) that are paid during the period of either the suspension of operations or the significant decline in gross receipts.
To claim the ERC, a business must first determine if it is eligible for the credit. This can be done by reviewing any government orders that have affected the business’s operations, or by comparing gross receipts from the current year to the previous year.
Click Here to Find out if You are Eligible
Once a business has determined that it is eligible for the ERC, it must calculate the credit amount. To do this, the business should first identify the qualified wages that are eligible for the credit. Qualified wages are those that are paid to an employee while the business is either fully or partially suspended due to a COVID-19 related government order, or while the business is experiencing a significant decline in gross receipts.
Once the qualified wages have been identified, the business should multiply that amount by 50% to determine the credit amount. The credit is capped at $5,000 per employee for wages paid during the period of a suspension of operations, and at $5,000 per employee for wages paid during the period of a significant decline in gross receipts. This means that the maximum credit a business can claim is $10,000 per employee.
To claim the ERC, a business must report the credit on its quarterly employment tax returns, or it can claim the credit as a refundable credit on its annual income tax return. When claiming the credit on the quarterly employment tax returns, the business should use Form 941, Employer’s QUARTERLY Federal Tax Return. When claiming the credit as a refundable credit on the annual income tax return, the business should use Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund.
It is important for businesses to keep good records when claiming the ERC. This includes keeping records of the qualified wages that were paid, as well as any government orders or declines in gross receipts that affected the business. This will help to ensure that the business has the necessary documentation to support its claim for the credit.
The ERC is a valuable resource for businesses that have been affected by the COVID-19 pandemic. By following the steps outlined above, businesses can claim the credit and receive financial relief to help them weather the storm of the pandemic.
Click Here to Find out if You are Eligible