A tax credit known as the ERC Credit was one of the provisions included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed in March of 2020. The government established the Employee Retention Credit (ERC) to assist companies adversely affected by the COVID-19 pandemic in retaining their workforce. In the following blog, we will go over the essential elements of the ERC Requirements that need to be understood by businesses in order for them to submit a winning application and be awarded the credit.
What is the Employee Retention Credit?
Businesses can claim the ERC, a refundable tax credit, when they file their federal payroll tax returns. Employers can claim a credit of fifty percent of the qualified wages paid to employees between March 13, 2020 and December 31, 2021. An employee can earn up to $5,000 as the maximum amount of credit for the entire period.
The credit is available to eligible employers who have experienced a significant decline in gross receipts or were fully or partially suspended due to a government order related to COVID-19. The credit equals a percentage of qualified wages paid to employees, up to a certain amount per employee.
The ERC has been extended and expanded by subsequent legislation, including the Consolidated Appropriations Act 2021 and the American Rescue Plan Act 2021. As of March 2023, the credit is available through December 31, 2023, and employers should be aware of several eligibility requirements and limitations. It is recommended that employers consult with a tax professional for specific guidance on the ERC.
Who is Eligible for the Employee Retention Credit?
To be eligible for the ERC Credit, a business must meet one of two criteria:
- The government order concerning COVID-19 halted operations for the entire quarter or a significant portion of it.
- During the last calendar quarter, the company saw a significant drop in its gross sales.
What are Qualified Wages?
Employers consider wages qualified if they paid them to employees during the eligibility period.The amount of qualified wages that can be used in the ERC Requirements is based on the size of the business and the number of employees it has.
Companies with less than 500 employees count all wages paid during the eligibility period as qualified earnings.
Companies with more than 500 workers on their payroll can only consider wages paid to employees who were not providing services during the period of eligibility as qualified wages.
How do you calculate the ERC Credit?
The Employee Retention Credit can assist businesses recover from COVID-19. An employee can earn a maximum amount of credit of $5,000 for the entirety of the period.
How to Apply for the Employee Retention Credit?
Businesses must complete Form 941 Employer’s Quarterly Federal Tax Return for appropriate calendar quarters to qualify for the ERC. By decreasing federal employment taxes deposited with the IRS, Form 941 can claim the ERC. If the ERC were not claimed, the amount of taxes would be the same.
Businesses can make a request for an advance payment of the credit if the amount of the ERC is greater than the amount of federal employment taxes owed by submitting Form 7200.
What Are The ERC Requirements?
The ERC requires businesses to keep documentation supporting their eligibility and the amount of qualified wages paid to each employee during the eligibility period. You must keep this documentation for at least five years after the ERC eligibility period ends. This documentation ought to include the following:
– Documentation demonstrating how, for the duration of the calendar quarter, the company was either wholly or partially halted operations as a result of a government order pertaining to COVID-19.
– Documentation demonstrating how the company’s total quarterly gross receipts experienced a significant drop during the period covered by the calendar.
– During the eligibility period, the employer detailed the qualified wages for each employee in the payroll records and paid them.
What are Some Common Mistakes Businesses Make When Applying for the ERC Credit?
When applying for the ERC, many companies make the following common errors, among others:
– Not showing enough proof that they were eligible for the credit in the right way.
– Not figuring out the right amount of their qualified wages
– A failure to calculate their proper amount of taxable income
What are Some Tips for Successfully Applying for and Receiving the Employee Retention Credit?
Some tips for successfully applying for and receiving the ERC include:
– Maintaining accurate and detailed records to support eligibility and qualified wages.
– Consulting with a tax professional to ensure compliance with all requirements.
– Filing Form 941 and any necessary advance payment requests in a timely manner.
The COVID-19 pandemic has hurt many businesses, but the Employee Retention Credit can help. Businesses are able to successfully claim this credit and keep their employees during these challenging times; if they have a thorough understanding of the essential components of the ERC Requirements and adhere to the best practices for the application and approval processes.