The Employee Retention Credit (ERC) is a refundable tax credit for employers subject to closure or experiencing a significant decline in gross receipts due to the COVID-19 pandemic. This credit was established in the Coronavirus Aid, Relief and Economic Security (CARES) Act and has been extended through the end of 2022. This article will provide you with an overview of the ERC tax credit and how it can help your business.
Qualifying for the ERC Tax Credit
In order to qualify for the ERC tax credit, your business must meet certain criteria. First, you must show that you have experienced a significant decline in gross receipts. This is defined as having gross receipts decrease by more than 20 percent when comparing the current quarter to the same quarter in the previous year. Additionally, you must show that you have experienced a full or partial suspension of trade or business due to orders from a governmental authority due to the COVID-19 pandemic.
If you meet both of these criteria, you will be eligible for the ERC tax credit. The credit is equal to the lesser of $5,000 per employee or the amount of wages paid to the employee during the suspension period. The credit is available for wages paid after March 12, 2020 and before January 1, 2022. It is important to note that employers cannot claim the credit for wages paid to employees in excess of $10,000 for any calendar quarter.
Claiming the ERC Tax Credit
If you are eligible for the ERC tax credit, you can claim the credit by filing Form 941, Employer’s Quarterly Federal Tax Return. You can also claim the credit on your annual tax return. The credit is refundable, so you will be able to receive a refund of the amount of the credit if it is more than the amount of taxes due. Additionally, you can use the credit to offset payroll taxes due, including the employer’s share of Social Security and Medicare taxes.
Additional Considerations
There are a few other important things to keep in mind when considering the ERC tax credit. First, you cannot claim the credit for wages that are taken into account for other refundable credits, such as the Work Opportunity Tax Credit or the Paid Family and Medical Leave Credit. Additionally, if you claim the credit, you must reduce the amount of wages you can claim for other credits, such as the Work Opportunity Tax Credit or the Paid Family and Medical Leave Credit.
It is also important to note that you cannot claim the credit for wages paid to employees who are not subject to closure or experiencing a significant decline in gross receipts due to the COVID-19 pandemic. Finally, if you receive a loan from the Paycheck Protection Program (PPP) or the Economic Injury Disaster Loan (EIDL) program, you will not be able to claim the ERC tax credit for wages covered by those loans.
Conclusion
The ERC tax credit is a valuable tool for employers experiencing closure or a significant decline in gross receipts due to the COVID-19 pandemic. The credit is equal to the lesser of $5,000 per employee or the amount of wages paid to the employee during the suspension period. To claim the credit, employers must file Form 941 or their annual tax return. Additionally, employers cannot claim the credit for wages taken into account for other refundable credits or wages paid to employees who are not subject to closure or experiencing a significant decline in gross receipts due to the COVID-19 pandemic.
If you are an employer who has been impacted by the COVID-19 pandemic, it is important to understand the ERC tax credit and how it can help your business. The ERC tax credit can provide you with much needed relief during these difficult times and can help you get back on your feet.
