People’s lives have been greatly impacted by the COVID-19 epidemic for more than two years. Businesses saw major setbacks, and some even came on the verge of shutting them down. While no government programs could fully compensate for the loss of profits and facility shutdowns, a significant relief scheme came up named Employee Retention Credit (ERC).
It was created under the Coronavirus Aid, Relief and Economic Security (CARES) Act to assist qualifying firms in keeping payrolls for their employees and assisting them in navigating the challenging financial situation brought on by the epidemic. This article will thoroughly examine the Employee Retention Credit, along with ERC credit qualifications and its application procedure.
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What is Employee Retention Credit?
Employee Retention Credit is basically a relief system for employers with which an eligible employer may claim a refundable tax credit. The credit is around 50% to 70% of the employee’s pay, and the term from which it is calculated is after March 12, 2020, and before January 1, 2021.
Although the program ended on September 30, 2021, businesses have three years from submitting their original payroll tax returns to look back and calculate their wages to claim their refund after fulfilling the ERC requirements.
Who is Eligible for the ERC?
ERC is available for anyone whose business and trades have gone through full or partial suspension because of government orders and who has experienced a decline in their gross receipts during the pandemic.
As the pandemic lasted for at least 2 years, there has been a bit of variation around the rules and regulations of the ERC refund program:
The year 2020
Employers can claim an ERC in the year 2020 if they have faced the following difficulties:
- Partial or full suspension of their business operation due to a government order that limited travel, group meetings, and travel due to COVID-19.
- The decline in cumulative receipts by more than 50% in comparison to a similar quarter in the past year.
According to ERC tax credit eligibility, employers from January 1st, 2021, can claim the refund if:
- Their business came to a standstill either fully or partially during COVID due to government restrictions.
- Declining gross receipts for the first, second, and third calendar quarters of 2021. It should be less than 80% of the same calendar quarter’s total revenue in 2019.
Qualified Wages Eligibility
- Each employee’s maximum qualifying wage is around $10,000, and the highest credit an employer may receive is 50% of the first $10,000 in qualified earnings. This accounts for a total of $5000 per employee. This criterion is eligible for the year 2020.
- For the year 2021, up to 70% of the qualifying salaries given to employees after December 31, 2020, but before October 1, 2021, may be claimed as credits by eligible employers. This rounds off wages per quarter up to $7000 per employee.
Size Of the Business:
Qualifying for the ERC tax credit varies according to the size of the business:
- For Small Business
For the year 2020, with 100 and few full-time employees
For the year 2021, with 500 and few full-time employees.
- For Large Business
For the year 2020, with 100 full-time employees and more.
For the year 2021, with 500 full-time employees and more.
Process of Claiming For ERC:
- Determine Eligibility:
The first step in the process of filing for a refund is checking for the requirements of the IRS and the ERC tax credit eligibility of your business. Go through the above-mentioned eligibility criteria for each year, i.e., 2020 and 2021, according to the wages and size of the business.
- Calculating Qualified Wages:
The next step is calculating the qualified wages. The wages under this step are paid to the employees during the eligibility period. This also includes health insurance costs. The wages of business owners and their spouses also qualify for the credit.
- File form 941:
With the help of Form 941, the citizens of the USA report income tax, social security tax, etc. This form is one of the basic ERC requirements for claiming a refund. Employers can also report for qualified wages with the help of this form. The wages you will enter in the 941 form cannot be deducted.
- Carry Forwarding of Credits:
If your business had less than 500 employees, then for the 2021 quarters, you can choose one of the following options:
- Fill in form 7200 if your anticipated credit exceeds the payroll tax deposit.
- Claim the credit on form 941 and receive tax refunds from previously paid deposits.
- Claim ERC:
Once done with the above steps, the last thing to do is to file for a refund on next year’s income tax return. With this, you can get an ERC refund from the IRS within four to six months.
ERC (Employee Retention Credit) has helped plenty of failing businesses retain their employees and workers during the pandemic. When businesses were on the brink of giving up, ERC worked as a life-saving potion for them. So, what’s the wait? If you have still not claimed your refund, this is the time to talk with a professional and apply for ERC refund.
- How much money do the qualifying businesses earn per employee?
Per employee, a qualifying business can earn around $26,000. If the number of employees is around 40, this number can go up to $1 million.
- How long does it take to receive approval from the IRS?
The time for approval varies from business to business. In some cases, receiving funds from the IRS can take around four to six months. First, the clients may receive letters regarding payroll taxes. After this, employers receive six checks each quarter for the next six months.
- What is the difference between PPP and ERC?
PPP (Payroll Protection Program) offers businesses eight weeks of payroll, including benefits. It was established by the same act as ERC, which is the CARES Act. It is supported by the Department of the Treasury. At the same time, ERC is a tax credit. It is paid by the IRS and does not require any repayment.
- Which employees are eligible to receive ERC?
All employees, regardless of the size of the company or type, are eligible to receive ERC. Only small businesses that take small loans and state and local government employees are not qualified according to the ERC tax credit eligibility.