What is An Employee Retention Tax Credit? A Simple Step by Step Guide to Understanding ERTC

Employee Retention Tax Credit

The pandemic shook almost every business and employment sector, leading to the laying off of several employees around the states. While thousands entirely lost their jobs and wages, a significant percentage of employers were lucky enough to benefit from the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s relief dubbed Employee Retention Tax Credit (ERTC). However, many businesses and individuals still have little understanding of ERTC tax credit and how to claim the relief. This article answers some of the most concerns of employers and companies.

What is ERTC?

ERTC is among the numerous government incentives under CARES Act that boost employers to retain their staff on payroll throughout the COVID-19 pandemic instead of completely stopping their contracts.

It’s a fully refundable credit that equals 50% of the succeeding wages businesses pay to their workers during the pandemic, up to $10,000 of each employee’s annual wages. That means the highest amount any qualified employer can claim over every worker is $5,000. Even so, there are criteria to meet for any business to claim this credit.

To alleviate the increasing liquidity concerns developing from the companies claiming the credit, the IRS came up with a strategy to disburse the advance credit payments to the qualifying businesses.

How to Qualify for ERTC

The ACT intends to use ERTC to help the businesses that faced challenges during the downturn of the pandemic. As a result, there are criteria for qualifying for the credit, and only eligible candidates can benefit.

Thankfully, the rules are a little lenient, covering almost all forms of businesses, save for government employees and self-employed persons.

A suitable employer can qualify for theERTC tax credit in two main ways. These include:

Number of Employees

In a business with less than 100 workers, all of them benefit from the tax credit. However, only employers who received payment despite being out of service during the coronavirus pandemic and due to the pandemic-related problems will qualify if the company’s employees exceed 100.

Business Closure

Every business that suffered total or partial closure in 2020 due to a government directive over pandemic-related issues qualifies for the tax credit. However, all companies eyeing this model must indicate a noteworthy reduction in their gross receipts during any quarter in the year (2020)

Similarly, the decline must be at most 50% of their gross receipts during the same quarter the previous year (2019).

Additionally, employers benefitting from the Paycheck Protection Program (PPP) loan don’t qualify for this relief.

How To Claim ERTC

Every qualifying employer will need to fill their total eligible wages plus any relevant credits in Form 941.

In the form, the businesses report their income and the Medicare and Social Security taxes they withheld from their workers’ paychecks.

The ERTC may not fix all the messes that the pandemic caused, but the program offers relief for businesses that suffered the cruelty of the virus. As a result, it’s essential that every qualifying business check with the IRS and see if they qualify to benefit from the advance.