The Employee Retention Credit (ERC) is a refundable payroll tax credit available to businesses. It was introduced as part of the CARES Act in 2020 to encourage businesses affected by the COVID-19 pandemic to keep workers on the payroll.
Keep in mind that eligible businesses can still claim the ERC, until April 2024 for 2020 claims and April 2025 for 2021 claims.
ARTICLE KEY POINTS:
- The Employee Retention Credit (ERC) is a refundable payroll tax credit. It's available to small businesses that kept their employees working during COVID-19 despite suffering financial losses.
- Eligible businesses can still claim the ERC until April 2024 for 2020 claims and April 2025 for 2021 claims.
- To claim the ERC, follow these steps: Determine your business' eligibility based on factors like employee count, government directives, and decline in gross receipts; Calculate the wages you paid to employees each year; Retain documentation and supportive records for future audits. If you've already filed taxes for 2020 and 2021, you can retroactively file for the ERC by amending your tax returns on Form 941-X.
Follow these steps to start taking advantage of the ERC for your business.
How to Claim the Employee Retention Credit: A Step-by-Step Guide
Navigating the process of claiming the Employee Retention Credit can be complex, but by following a step-by-step approach, you can better understand the requirements.
Businesses that kept employees on payroll during the pandemic despite suffering monetary losses can still claim the ERC in 2023.
1. Determine Your Eligibility
Small businesses can claim the ERC if:
- They employed 100 full-time employees or less in 2019 for the 2020 ERC, or 500 employees or less for 2021
- Their operations were paused or suspended due to COVID-driven government directives in 2020 or 2021
- The faced a significant decline in gross receipts. That is, below 50% for the same quarter in 2019 (for the 2020 ERC) and below 80% (for the 2021 ERCC).
- They qualify as “recovery startup businesses” - a business that began operating after February 15, 2020.
There are multiple nuances to determining eligibility for ERC. To delve deeper into the requirements, see our full Guide to Employee Retention Credit Eligibility.
If you're unsure if your business qualifies, you consulting a qualified third-party ERC service provider.
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2. Calculate Qualified Wages
The amount of tax credit you can claim is based on "qualified wages" paid to your employees. Per the IRS, qualified wages include hourly or salary wage, paid vacation, tips over a certain amount and certain health expenses paid out to your employees.
- You can claim a maximum amount of $10,000 in wages paid per employee in 2020.
- You can get a maximum of $5,000 back from the IRS (50% of qualified wages).
- Claim a maximum of $10,000 in qualified wages per employee, per quarter of 2021.
- The maximum credit amount per employee is $7,000 per quarter (70% of qualified wages).
3. Claim the Credit on Form 941
After calculating your qualified wages and determining the amount of credit you can claim on your taxes, the next crucial step is to file your Form 941.
This is an IRS form where you list federal withholdings from employees, like wages, tips, sick pay and more. Once you have completed all required information accurately, you can file either by mail or electronically. Opting for electronic filing is more convenient, as the federal e-File system is now operational.
Keep in mind, however, that the government is currently facing a backlog of ERC requests, so it may take some time to receive your credit.
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4. Retain Documentation and Supportive Records
It's important to retain all relevant documentation and records related to the ERC, in case of any future IRS audits or reviews. Be sure to keep your receipts, employment records and anything else that proves your eligibility.
5. File for Retroactive Credits, If Applicable
If eligible, you can amend your tax returns for 2020 and 2021 to receive the ERC retroactively. Do so by filling out Form 941-X to amend your previously filed Form 941 for the applicable quarters. Similarly to Form 941, you can file either online or via mail.
Be sure to consult with professional advisors or the IRS for specific guidance tailored to your circumstances.
If eligible, you can amend your tax returns for 2020 and 2021 to receive the ERC retroactively.
Successfully obtaining the Employee Retention Credit involves assessing your business's eligibility, accurately calculating qualified wages, claiming the credit on your payroll tax form, retaining all necessary documentation, and filing for retroactive credits if applicable. Navigating these steps can be challenging, but businesses can maximize the financial support they are entitled to receive with the right resources.