With the outbreak of the COVID-19 pandemic, the entire world economy transformed in 2020. As nations around the world locked down their citizenry, several businesses faced significant revenue losses. As a result, many companies downsized to cut costs.
In the US, Congress recognized that businesses needed an incentive to keep employees on their payroll. As a result, Congress included the Employee Retention Credit (ERC) in the CARES Act.
You may be wondering, “What is ERC?” Essentially, this clause provided a tax credit designed to help employers retain employees on their payroll during the pandemic. For a more detailed explanation of how this credit works, check out the guide below!
Understanding Employee Retention Credit: How the Credits Work
When asking, “what is employee retention credit,” it’s helpful to answer by explaining how it works. This credit is a refundable payroll tax credit for qualifying companies. The IRS calculates the credit as a percentage of the wages paid to the company’s employees.
Both the CARES Act and CAA allowed companies to claim the credit against Social Security taxes. However, the ARPA only enables companies to claim this tax credit against Medicare taxes.
Companies can claim the Employee Tax Credit on their quarterly returns. In doing so, it provides relief for businesses by reducing their employment tax deposits. Please note that the ARPA extends the ERC from June 20, 2021, to the end of the year.
What Businesses Qualify for Employee Retention Credit
Not all businesses qualify for ERC. When the CARES Act became law in March 2020, it originally excluded companies that took a Paycheck Protection Program Loan. However, many employers qualified for this loan and deemed it preferable to the ERC.
This choice made the ERC limited in its scope for most of 2020. As a result, Congress cut this provision in the Consolidated Appreciations Act of December 2020. Now, businesses can optimize both the PPP Loan and ERC.
In 2021, businesses can claim ERC credit if they meet either of these criteria:
- Their operations were either fully or partially suspended because of government limitations caused by COVID-19
- They experience a significant decline in gross receipts, a period beginning at the start of the calendar quarter.
How Much is the Credit Worth?
In 2020, the credit was equal to 50 percent of qualified wages. With the 2021 extensions, the credit now equals 70 percent of qualified wages.
However, there are a few stipulations. First, qualified wages must not exceed $10,000 for each employee per quarter
The credit’s maximum value is $7,000 per quarter, totaling an available credit of $28,000 for each employee. You can learn more about the tax credit by visiting https://erctoday.com/helpful-faqs/.
Apply for Employee Retention Credit Today!
Armed with these Employee Retention Credit facts, all you have to do is claim the credit. You can do this by filing an Amended Form 941 or requesting an advance payment with a Form 7200.
Use this credit to protect your employees and advance your business. Take whatever precautions necessary to get through this pandemic.
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