Employee Retention Credits (ERC) is an initiative from the U.S government aimed at helping businesses keep their employees on their payroll. This refundable tax credit is a significant method of counteracting the economic drawbacks that resulted from the Covid-19 pandemic and is beneficial for most businesses. Read on to learn more about the requirements and process to claim these credits.
Understanding Employee Retention Credits
Before you dive into the claiming process, it’s essential to comprehend the basics of Employee Retention Credits. These are refundable tax credits equal to 70% of the eligible wages that a qualifying employer has paid to their employees, capped at $10,000 per employee per quarter.
Employee Retention Credit’s Eligibility
To be eligible for ERC, businesses must meet certain criteria. They must have experienced significant interruption due to government orders or have faced a substantial decline in gross receipt. In this case, the ‘substantial decline’ is considered a greater than 50% reduction compared to the same quarter in 2019.
Qualifying Wages
The second part of the credit involves qualifying wages. These are wages paid to employees who were not working because of the downturn. This also includes amounts paid to provide and maintain a group health plan.
How to Claim for Employee Retention Credit
You may claim ERC while filing your quarterly federal tax return, using Form 941, Employer’s Quarterly Federal Tax Return. If your employment tax deposits aren’t sufficient to cover the credit, you may request an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to Covid-19. You are permitted to reduce federal employment tax deposits in anticipation of the credit.
Amending Previous Tax Claims
If you discover that you qualified for an ERC in a previous quarter, you can amend the quarterly tax return with Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
Calculating the Credit
The credit amount can be calculated by recognizing the qualifying wages and the qualified health plan expenses paid in a calendar quarter. The rate is 70% of eligible wages, capped at $10,000 of wages per employee, per quarter. In other words, the maximum credit available per quarter is $7,000 per employee.
Frequently Asked Questions
Can I claim Employee Retention Credits if I received a PPP loan?
Yes, although The CARES Act, initially prohibited companies from claiming ERC if they obtained a PPP loan. Now, businesses can claim both, but not for the same wages.
When is the Employee Retention Credit due?
ERC is claimed by reducing employment tax liabilities on your quarterly federal tax returns, whereas advance credit can be claimed with Form 7200. Businesses should plan throughout the year to ensure they are maximizing their benefits.
In conclusion, the Employee Retention Credit can be a valuable tool for companies in managing their payroll finances, particularly in these challenging times. It is recommended to seek aid from an accounting professional to ensure accurate claim processing, tax management, and adherence to the newly revised provisions/rules.
