The Employee Retention Credit (ERC) is a tax credit that provides financial assistance to businesses impacted by the COVID-19 pandemic. The ERC offers substantial benefits to eligible businesses that retain employees, helping them to stay afloat and recover from the economic downturn caused by the pandemic. This article will explain the working of Employee Retention Credit, including its requirements and benefits. 

What is the Employee Retention Credit?

The Employee Retention Credit is a tax credit that allows eligible businesses to offset a portion of their payroll taxes against their tax liability. The ERC helps businesses retain employees during the COVID-19 pandemic by providing them with a financial incentive to keep their staff on the payroll. Cares Acr in March 2020 introduced the ERC.

Who is eligible for the Employee Retention Credit?

Businesses impacted by the COVID-19 pandemic may be eligible for the Employee Retention Credit. Eligible businesses include those that:

  • Had to fully or partially suspend their operations due to a government order related to COVID-19, OR
  • Have experienced a significant decline in gross receipts (at least 20%) compared to the same calendar quarter in 2019.

How much is the Employee Retention Credit worth?

The Employee Retention Credit is worth up to 70% of eligible wages paid to each employee, up to a maximum of $10,000 per employee per quarter. Besides, you can also claim the credit for wages paid between March 13, 2020, and December 31, 2021.

How to claim the Employee Retention Credit?

Businesses can claim the Employee Retention Credit by filing Form 941, Employer's Quarterly Federal Tax Return. Employers can apply for the credit against their Social Security taxes. Alternatively, businesses can request an advance credit payment by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

What are the requirements for claiming the Employee Retention Credit?

To claim the Employee Retention Credit, businesses must meet certain ERC requirements, including:

  • The business must have operated for all or part of the calendar year 2020 or 2021.
  • They must have experienced a full or partial suspension of operations due to a government order related to COVID-19 OR a significant decline in gross receipts.
  • The business must have paid eligible wages to eligible employees during the covered period.
  • The business must not have received a Paycheck Protection Program (PPP) loan, or if it did receive a PPP loan, it must have used the loan proceeds for expenses other than those that qualify for PPP loan forgiveness.

Can businesses claim both the PPP and the ERC?

Yes, businesses can claim both the PPP and the ERC, but they cannot use the same wages for both programs. This means businesses can use the PPP loan funds for certain expenses and claim the ERC for other eligible wages. However, businesses must ensure they do not double-dip and use the same wages for both programs. It is important to consult with a tax professional to determine the best strategy for maximizing the benefits of both programs.

What are the benefits of the Employee Retention Credit?

The Employee Retention Credit (ERC) is a tax credit that significantly benefits eligible businesses. Some of the ERC benefits include:

Cash refund

The ERC is refundable, meaning eligible businesses can receive a cash refund for any credit amount that exceeds their payroll tax liability.

Tax credit

The ERC is a tax credit that can be applied against payroll taxes, including Social Security and Medicare taxes.

Retention of employees

The ERC incentivizes businesses to retain their employees by providing a credit for eligible wages paid during the pandemic.

Up to $33,000 per employee

Eligible businesses can claim a credit of up to $7,000 per employee per quarter, for a total credit of up to $33,000 per employee for wages paid between March 13, 2020, and December 31, 2021.

Expanded eligibility

The American Rescue Plan Act expanded the ERC eligibility to include businesses that received PPP loans as long as they met certain ERC requirements.

How Does the Employee Retention Credit Work?

The Employee Retention Credit (ERC) is a tax credit that provides financial assistance to eligible businesses affected by the COVID-19 pandemic. The ERC is designed to encourage businesses to retain employees and continue paying wages during the pandemic. Here's how it works:

Eligibility

To be eligible for the ERC, a business must have experienced a significant decline in gross receipts or have been partially or fully suspended due to a government order during the pandemic.

Calculation of credit

The ERC is calculated based on the wages paid to eligible employees during the qualifying period. For wages paid between March 13, 2020, and December 31, 2020, the credit is 50% of eligible wages, up to a maximum of $5,000 per employee. For wages paid between January 1, 2021, and December 31, 2021, the credit is increased to 70% of eligible wages.

Qualified wages

Eligible wages for the ERC include wages paid to employees during the qualifying period, including health benefits. 

Claiming the credit

Businesses can claim the ERC on their quarterly employment tax returns, including Form 941. You can use a payroll tax credit to offset payroll taxes or to get a refund if the credit exceeds payroll taxes.

Interaction with PPP

As of March 2021, businesses that received a PPP loan can also claim the ERC. But not for the same wages used to calculate PPP loan forgiveness. This means businesses can receive both the PPP loan and the ERC for different wages.