What business owners need to know to claim the Employee Retention Credit?

Running a business is no easy feat, especially in the current climate. As business owners, it’s important to stay informed of all the government incentives and tax credits available to help offset costs. One such incentive is the Employee Retention Credit, which can help business owners retain and pay their employees during difficult times. In this article, we’ll explore what business owners need to know to claim the Employee Retention Credit.

Employee Retention Credit: What Business Owners Need to Know

The Employee Retention Credit (ERC) is a tax credit designed to help businesses that have been impacted by the coronavirus pandemic. The ERC provides businesses with a tax credit of up to $5,000 per employee for wages paid between March 13, 2020 and December 31, 2020. Business owners can use the credit to offset their employer payroll taxes and reduce their overall tax liability. In order to claim the credit, business owners must understand the eligibility requirements, how to calculate the credit, and how to file for the credit.

Eligibility Requirements for Employee Retention Credit

In order to be eligible for the ERC, businesses must meet certain criteria. First, businesses must have been affected by the coronavirus pandemic. This means that the business must have been forced to partially or fully suspend operations due to a governmental order, or the business must have seen a significant decline in gross receipts. Second, the business must have been in operation between March 13, 2020 and December 31, 2020. Lastly, the business must have fewer than 500 employees.

Additionally, there are certain types of businesses that are not eligible for the ERC. These businesses include federal, state, and local governments, as well as churches, non-profit organizations, and foreign employers.

Calculating the Employee Retention Credit

The amount of the ERC that a business is eligible for depends on the amount of wages paid and the number of employees. For businesses that experienced a full or partial suspension of operations due to a governmental order, the ERC is equal to 50% of the qualified wages paid between March 13, 2020 and December 31, 2020, up to $10,000 per employee. For businesses that experienced a significant decline in gross receipts, the ERC is equal to 70% of the qualified wages paid between March 13, 2020 and December 31, 2020, up to $10,000 per employee.

Businesses are limited to a total of $5,000 per employee for each of the two time periods, March 13, 2020 to June 30, 2020 and July 1, 2020 to December 31, 2020. The ERC is also limited to the amount of the employer’s Social Security taxes for the year.

Filing for the Employee Retention Credit

Business owners must file for the ERC when they file their quarterly or annual payroll tax returns. The payroll tax return must include the Form 941, along with Form 941-X, which is used to adjust the amount of payroll taxes reported. Business owners must also include the ERC information on their annual income tax return.

Claiming the Employee Retention Credit on Form 941

Businesses claiming the ERC must report the amount of the credit on Form 941. The credit is reported in Part 1, Line 12a of Form 941. If a business is claiming the ERC for both time periods, the amount for each period should be reported in Lines 12b and 12c, respectively.

Claiming the Employee Retention Credit on Form 941-X

Businesses claiming the ERC must also complete and submit Form 941-X. This form is used to adjust the amount of payroll taxes reported. The amount of the ERC must be reported in Line 3 of Form 941-X. The amount of the ERC should be the same as the amount reported in Part 1, Line 12a of Form 941.

Claiming the Employee Retention Credit on the Annual Income Tax Return

Businesses claiming the ERC must also report the amount of the credit on their annual income tax return. The amount of the ERC should be reported on Line 11a of Form 3800. If a business is claiming the ERC for both time periods, the amount for each period should be reported in Lines 11b and 11c respectively.

Conclusion

The Employee Retention Credit is a valuable tax credit that can help businesses impacted by the coronavirus pandemic. In order to claim the credit, business owners must understand the eligibility requirements, how to calculate the credit, and how to file for the credit. By understanding the requirements and filing the proper paperwork, business owners can take advantage of this tax credit and reduce their overall tax liability.

Frequently Asked Questions

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) is a refundable tax credit for employers who are subject to closure due to Coronavirus-related governmental orders. The credit is available to employers that had to suspend operations or experienced a significant decline in gross receipts when compared to the same quarter of the previous year. The credit is available for wages paid between March 13 and December 31, 2020.

What businesses are eligible for the Employee Retention Credit?

Businesses of any size are eligible for the Employee Retention Credit if they have been forced to suspend operations or experienced a significant decline in gross receipts when compared to the same quarter in 2019. This includes businesses that were fully or partially suspended due to a governmental order related to COVID-19, as well as those that experienced a significant decline in gross receipts.

What types of wages are eligible for the Employee Retention Credit?

Wages paid to employees after March 12, 2020 and before January 1, 2021 are eligible for the Employee Retention Credit. Eligible wages include wages paid for time employees are not providing services due to a governmental order related to COVID-19, as well as wages paid for time employees are providing services. Health benefits provided to employees are also eligible for the credit.

How much is the Employee Retention Credit?

The Employee Retention Credit is equal to 50% of qualified wages paid to each employee, up to a maximum of $5,000 per employee. This means that the maximum credit available per employee is $2,500.

How is the Employee Retention Credit claimed?

The Employee Retention Credit is claimed on the employer’s quarterly Form 941, Employer’s Quarterly Federal Tax Return. Employers can also claim the credit on the Form 944, Employer’s Annual Federal Tax Return.

Are there any other requirements to claim the Employee Retention Credit?

Yes, in addition to the requirements outlined above, employers must also meet certain eligibility requirements to claim the Employee Retention Credit. These include: having a valid EIN, filing all required employment tax returns, and having sufficient employment tax deposits. Employers must also make sure that they are not claiming any of the wages paid to an employee as wages eligible for the work opportunity tax credit or as sick leave or family leave wages eligible for the payroll tax credits.

Employee Retention Credit 2021: What Business Owners Need to Know!

Business owners need to be aware of the Employee Retention Credit in order to take full advantage of the benefits it offers. The credit is a valuable tool to help businesses retain staff and keep their operations running smoothly. By understanding the eligibility requirements and taking the time to properly submit the required forms, business owners can take advantage of the Employee Retention Credit and keep their staff employed, their operations running, and their bottom line healthy.