The Employee Retention Tax Credit (ERTC) is a refundable tax credit designed for businesses to keep their employees on their payroll, especially during economic difficulties. Navigating through the claim process can be challenging for many business owners, especially with complex criteria and amendments. This article will guide you through the necessary steps involved in the ERTC claim process.
Understanding the Employee Retention Tax Credit
The ERTC was first introduced under the CARES Act in March 2020 to help businesses cope with the adverse economic impacts of the COVID-19 pandemic. Qualifying businesses can claim a portion of the wages paid to their employees during the pandemic as a tax credit. In essence, the ERTC is designed to help businesses maintain their workforce during trying times.
Eligibility for ERTC
Generally, two types of employers are eligible for the ERTC:
- Employers who fully or partially suspend their operations due to governmental orders related to COVID-19.
- Employers who experience a significant decline in gross receipts (less than 50% compared to the same quarter of the previous year).
How to Calculate the ERTC
The amount of ERTC your business can claim depends on several factors. Initially, the credit was 50% of qualified wages paid to an employee up to $10,000 annually. However, recent updates have increased the percentage and extended the qualifying period.
Claiming the ERTC
To claim the ERTC, employers can report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns (typically Form 941). If your business qualifies for the ERTC, the credit can be utilized to offset any outstanding payroll tax liabilities. In addition, if your credit amount surpasses your business’s payroll tax liabilities, the remainder can be requested as a refund.
Frequently Asked Questions
What are qualified wages?
Qualified wages are the wages paid by an eligible employer to an employee during eligibility periods. It also includes a portion of health insurance costs.
How is the “significant reduction in gross receipts” assessed?
The assessment is done by comparing the gross receipts of the same quarter in 2019. If the gross receipts have reduced by more than 50%, the employer is eligible for the ERTC.
Can new businesses claim the ERTC?
New businesses that were not in existence for all or part of 2019 can still qualify for the ERTC. The eligibility for such businesses is calculated differently.
In conclusion, navigating the Employee Retention Tax Credit claim process may be complex, but understanding eligibility, wage calculations, and the claim process can significantly streamline the procedure. Always consider seeking advice from tax professionals to ensure you are making the most out of this beneficial provision.