The Employer Retention Credit (ERC) was introduced by the U.S. government as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. The aim of the ERC is to help businesses that were impacted by the COVID-19 pandemic to retain their employees and avoid layoffs. This refundable tax credit is available to businesses of all sizes, including tax-exempt organizations, and has been extended multiple times since its introduction. Here’s what you need to know about the ERC and how it can benefit your business.
Who is eligible for ERC?
Businesses that experienced a significant decline in gross receipts or were fully or partially suspended due to government orders during any calendar quarter in 2020 or 2021 can claim the ERC. The decline in gross receipts must be 50% or more in 2020 and 20% or more in 2021, compared to the same quarter in 2019. If your business was not in operation in 2019, you can use the same quarter in 2020 to determine eligibility.
Additionally, businesses that received a Paycheck Protection Program (PPP) loan can still claim the ERC, but not for the same wages used to calculate PPP loan forgiveness. This means that if a business received a PPP loan and paid wages to its employees during the covered period, it can claim the ERC on any additional wages paid during that same period, subject to certain limitations.
How much is the ERC worth?
The ERC is a refundable tax credit that is worth up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter in 2021. The credit is calculated based on the amount of qualified wages paid to each employee during the eligible quarter. The credit can be claimed for wages paid between March 13, 2020, and December 31, 2021.
In 2020, the ERC was initially set at 50% of qualified wages up to $10,000 per employee for the entire year. This was later increased to 70% of qualified wages up to $10,000 per quarter in 2021. This means that a business can claim up to $14,000 per employee for the first two quarters of 2021 and up to $7,000 per employee for the third and fourth quarters of 2021.
How to claim ERC?
To claim the ERC, businesses must report the credit on their federal employment tax returns, typically Form 941, Employer’s Quarterly Federal Tax Return. The credit is taken against the employer’s share of Social Security tax, and any excess credit is refundable. This means that if the amount of the ERC exceeds the employer’s share of Social Security tax for a quarter, the excess credit will be refunded to the business.
The IRS has provided guidance and forms to help businesses claim the ERC. Businesses can also work with their tax advisors or payroll providers to ensure they are properly claiming the credit.
How ERC benefits businesses?
The ERC can benefit businesses in multiple ways. First, it can provide financial relief to businesses that were impacted by the pandemic and may be struggling to retain their employees. The credit can help businesses avoid layoffs and continue to pay their employees during challenging times.
Second, the ERC can provide a tax benefit to businesses. The credit can reduce a business’s federal employment tax liability, and any excess credit can be refunded to the business. This can help businesses improve their cash flow and invest in other areas of their operations.
Finally, the ERC can provide a competitive advantage to businesses. By retaining their employees, businesses can maintain their workforce and avoid the cost of rehiring and training new employees. This can help businesses remain competitive in their industry and position themselves for growth once the pandemic subsides.
