What is the Employee Retention Credit (ERC) & How Does it Work
If you’ve been hearing a lot about ERC and are wondering what is the Employee Retention Credit and how does it work, this article will give you a good overview.
Originally part of the CARES Act that was created by the federal government, the Employee Retention Credit (ERC) is a tax credit for businesses that were impacted by the COVID-19 pandemic. The ERC is designed to provide financial assistance to these businesses that retained employees during the period of the pandemic. In this article, we’ll explore what the ERC is and how it works.
What is the ERC?
In March of 2020, the CARES (Coronavirus Aid, Relief, and Economic Security) was introduced. Later it evolved into the Employee Retention Credit program that provides tax credit to businesses. The credit was initially available for qualified wages paid between March 12, 2020 and December 31, 2020. However, the Consolidated Appropriations Act, 2021, extended the availability of the ERC through June 30, 2021. The American Rescue Plan Act further extended the ERC through December 31, 2021.
Businesses of all sizes, including non-profit organizations and self-employed individuals, may be eligible to receive the tax credit. To qualify for ERC, businesses must have experienced either a full or partial suspension of operations due to government orders related to COVID-19 or a significant decline in gross receipts.
How Does the ERC Work?
The ERC is a refundable tax credit that is claimed on the employer’s quarterly federal tax return on Line 11c of the IRS Form 941. The business can file an amended return if they have already filed the 941 for the relevant quarter. Alternatively, businesses can use Form 7200 (Advance Payment of Employer Credits Due to COVID-19) to request an advance payment of the ERC.
The amount of the ERC is based on the amount of qualified wages paid to employees during the eligibility period and are a maximum of $10,000 per employee per quarter, including health plan expenses. Businesses with less than 500 employees will be eligible to to get 50% of qualified wages paid between March 13th and December 31st, 2020, and 70% of qualified wages paid between January 1st and December 31st, 2021.
Businesses with more than 500 employees will be able to get 50% of qualified wages paid during the same period and up to a maximum of $26,000 per employee.
The ERC is a refundable tax credit, which means that if the amount of the credit exceeds the business’s payroll tax liability, the excess credit is refunded to the business. This can provide valuable financial assistance to businesses impacted by the COVID-19 pandemic.
Eligibility Criteria for the ERC
Certain criteria must be met for businesses to be eligible for the ERC. The eligibility criteria for the ERC include:
Significant Decline in Gross Receipts
To be able to apply for the ERC, a business must have experienced a large decline in gross sales during the pandemic. A large decline in gross sales is defined as a decline of 20% or more compared to the same quarter in the previous year. Businesses can also compare their gross sales to the same quarter in 2019 if they were not in operation in 2020.
Partial or Full Suspension of Operations
Businesses can also be eligible for the ERC if they experienced a partial or full suspension of business due to a government order related to COVID-19. A partial suspension of business means that the business was able to continue some operations, while a full suspension means that the business had to shut down completely.
Conclusion
In conclusion, that’s a quick summary of what is the Employee Retention Credit (ERC) & how it works. If you are a business owner or manage a business with 5 or more employees, you may be able to receive a tax credit too. The tax laws are rather complicated and we recommend using an experienced ERC Specialist or accounting firm through the process. Here are some reviews of the best ERC accountants and specialists so that businesses can determine which option is best for their needs.
If you’ve been hearing a lot about ERC and are wondering what is the Employee Retention Credit and how does it work, this article will give you a good overview.
Originally part of the CARES Act that was created by the federal government, the Employee Retention Credit (ERC) is a tax credit for businesses that were impacted by the COVID-19 pandemic. The ERC is designed to provide financial assistance to these businesses that retained employees during the period of the pandemic. In this article, we’ll explore what the ERC is and how it works.
What is the ERC?
In March of 2020, the CARES (Coronavirus Aid, Relief, and Economic Security) was introduced. Later it evolved into the Employee Retention Credit program that provides tax credit to businesses. The credit was initially available for qualified wages paid between March 12, 2020 and December 31, 2020. However, the Consolidated Appropriations Act, 2021, extended the availability of the ERC through June 30, 2021. The American Rescue Plan Act further extended the ERC through December 31, 2021.
Businesses of all sizes, including non-profit organizations and self-employed individuals, may be eligible to receive the tax credit. To qualify for ERC, businesses must have experienced either a full or partial suspension of operations due to government orders related to COVID-19 or a significant decline in gross receipts.
How Does the ERC Work?
The ERC is a refundable tax credit that is claimed on the employer’s quarterly federal tax return on Line 11c of the IRS Form 941. The business can file an amended return if they have already filed the 941 for the relevant quarter. Alternatively, businesses can use Form 7200 (Advance Payment of Employer Credits Due to COVID-19) to request an advance payment of the ERC.
The amount of the ERC is based on the amount of qualified wages paid to employees during the eligibility period and are a maximum of $10,000 per employee per quarter, including health plan expenses. Businesses with less than 500 employees will be eligible to to get 50% of qualified wages paid between March 13th and December 31st, 2020, and 70% of qualified wages paid between January 1st and December 31st, 2021.
Businesses with more than 500 employees will be able to get 50% of qualified wages paid during the same period and up to a maximum of $26,000 per employee.
The ERC is a refundable tax credit, which means that if the amount of the credit exceeds the business’s payroll tax liability, the excess credit is refunded to the business. This can provide valuable financial assistance to businesses impacted by the COVID-19 pandemic.
Eligibility Criteria for the ERC
Certain criteria must be met for businesses to be eligible for the ERC. The eligibility criteria for the ERC include:
Significant Decline in Gross Receipts
To be able to apply for the ERC, a business must have experienced a large decline in gross sales during the pandemic. A large decline in gross sales is defined as a decline of 20% or more compared to the same quarter in the previous year. Businesses can also compare their gross sales to the same quarter in 2019 if they were not in operation in 2020.
Partial or Full Suspension of Operations
Businesses can also be eligible for the ERC if they experienced a partial or full suspension of business due to a government order related to COVID-19. A partial suspension of business means that the business was able to continue some operations, while a full suspension means that the business had to shut down completely.
Conclusion
In conclusion, that’s a quick summary of what is the Employee Retention Credit (ERC) & how it works. If you are a business owner or manage a business with 5 or more employees, you may be able to receive a tax credit too. The tax laws are rather complicated and we recommend using an experienced ERC Specialist or accounting firm through the process. Here are some reviews of the best ERC accountants and specialists so that businesses can determine which option is best for their needs.
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