Understanding the Employee Retention Tax Credit
Employee retention is a crucial aspect of any successful business. Finding and retaining talented employees can greatly contribute to a company's growth and overall success. To encourage employers to keep their employees during challenging times, the government offers various incentives, including the Employee Retention Tax Credit (ERTC).
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 Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the COVID-19 pandemic. Its purpose is to provide financial relief to businesses that have been severely impacted by the pandemic and to encourage them to retain their employees.
Eligibility Criteria
To be eligible for the Employee Retention Tax Credit, a business must meet certain criteria. They include:
- The business must have been fully or partially suspended due to government orders related to COVID-19, or
- The business must have experienced a significant decline in gross receipts. If the business' gross receipts for a calendar quarter in 2020 were less than 50% compared to the same quarter in 2019, it meets the decline in gross receipts requirement. For businesses in 2021, the threshold is reduced to 20%.
Calculating the Credit
The Employee Retention Tax Credit is calculated based on qualified wages paid to employees during the eligible periods. For 2020, the credit is 50% of qualified wages, up to $10,000 per employee for the entire year. In 2021, the credit is increased to 70% of qualified wages, up to $10,000 per employee per quarter.
Qualified Wages
Qualified wages are wages paid to eligible employees during the eligible periods. For businesses with an average of 100 or fewer full-time employees in 2019, all wages paid to employees during the eligible periods are considered qualified wages, regardless of whether the employee worked or not. For businesses with more than 100 employees, qualified wages only include wages paid to employees who did not provide services due to COVID-19-related reasons.
Claiming the Credit
To claim the Employee Retention Tax Credit, businesses must report the credit on their quarterly employment tax returns. Eligible businesses can also request an advance payment of the credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19, to the IRS.
Interaction with Payroll Protection Program (PPP)
It is important to note that businesses that have received a loan under the Payroll Protection Program (PPP) can still claim the Employee Retention Tax Credit, but the same wages cannot be used for both. Any wages used to claim the ERTC cannot be included in the forgiveness calculations for the PPP loan.
Conclusion
The Employee Retention Tax Credit is a valuable incentive for businesses struggling during the COVID-19 pandemic. By providing financial relief and encouraging employee retention, this tax credit helps businesses navigate through challenging times. Understanding the eligibility criteria, calculating the credit, and properly claiming it can help businesses take full advantage of this opportunity.