The Employee Retention Credit (ERC) is a refundable payroll tax credit that offers a tax credit to large and small companies that continue to pay employees in 2020 and 2021. It was created in response to the COVID-19 pandemic and the economic shutdown.
What is Employee Retention Credit, exactly?
Congress established the Employee Retention Credit in the Coronavirus Aid, Relief, and Economic Security Act (CARES), incentivizing businesses to keep their employees on the payroll during the 2020 coronavirus pandemic season.
This tax credit was originally worth 50% of eligible employee salaries, but it has since been reduced to $10,000 per employee, with a maximum credit of $5,000 for wages earned between March 13, 2020, and December 31, 2021.
The eligible earnings percentage has now increased to 70% by 2021. The maximum annual salary per employee has been increased from $10,000 to $10,000 per quarter.
The credit is available to all eligible businesses of any size that pay qualified wages to employees; however, businesses with fewer than 500 employees must meet additional conditions in various sections of 2020 and 2021.
Who is Eligible for the Employee Retention Credit?
Who was eligible for the employee retention credit? Nonprofits and private businesses must meet one of the two criteria listed below to be eligible for the employee retention credit. The first criterion is a revenue decline in any of the 2020 or 2021 quarters. The second criterion is whether your company had to close down partially or completely due to a government order.
Revenue Decline Test
It is important to note that the revenue decline test varies between 2020 and 2021. For 2020, your revenue decline must be at least 50% less than the same quarter in 2019. For 2021, the reduction must be at least 20% for any quarter compared to the same quarter in 2019.
Government Ordered Closure
Many businesses were forced to close or change operations when the pandemic struck. Some had to reduce their business hours, while others had to close completely on certain days of the week.
This was primarily because many businesses were not deemed necessary. Another reason businesses had to restrict their operating hours was to adhere to social distancing guidelines.
You are eligible for the employee retention credit if you had to close your business partially or entirely due to a local, state, or federal order. You also qualify if you had to change your business model and were unable to complete those tasks remotely.
Other ways to qualify for govt closure:
Unable to access vendors used by your company
Following social distancing rules and restricting the number of customers permitted in your establishment
Due to a thorough cleaning, the business was forced to close.
Another excellent example can be found in restaurants. You qualify if you own a restaurant but had to close your dining room area due to a government order. Even if you could accept take-out orders, you had to complete a portion of your business, which counts as a partial closure.
You qualify if you own a retail store where you sell items in person, but a government order forced you to close the storefront.
How To Claim the Employee Retention Credit
The ERC, unlike many other tax breaks available to small business owners, does not offset income taxes. Instead, it is a credit to offset the employer’s share of the Social Security tax.
Taxpayers could claim the credit in two ways:
1- Subtract the amount of their expected credit from their employment tax deposits. If the expected credit exceeds the taxpayers’ payroll tax deposits, they could request an advance payment by completing Form 7200.
2- Fill out Form 941, Employer’s Quarterly Federal Tax Return, to claim the employee retention credit and receive a refund of previously paid tax deposits.
Apply for the Employee Retention Credit (ERC) today
It’s time to claim the refund you are due now that you know who is eligible for the employee retention tax credit. There is no need to worry even if completing the paperwork is time-consuming because you must present numerous different documents to demonstrate your eligibility for the credit.
A good place to start is to work with a tax professional or company specializing in handling employee retention credits.
When you are ready, contact Lenders Loan Capital to find out how much you might receive as an advance payment. Our team is here to help you every step of the way and answer any questions or concerns you may have.