What is Employee Retention Tax Credit?

Employee retention tax credits are a form of relief that business owners can take advantage of in order to help them retain employees during difficult economic times. The credit is available to businesses that have experienced financial hardships due to the coronavirus pandemic, and it provides a tax break for employers who keep their employees on payroll.

How Does an Employee Retention Tax Credit Work?

An employee retention tax credit (ERTC) is designed to help businesses offset the financial losses they experience when they have to reduce staff levels or cut wages during tough economic times. To qualify, businesses must demonstrate that their gross receipts have decreased due to the impacts of the COVID-19 pandemic. If they meet the qualifications, they are eligible to receive a refundable Federal income tax credit equal to 50% of qualified wages paid up to $5,000 per employee from March 13, 2020 to December 31, 2020.

Qualifying for an Employee Retention Tax Credit

Businesses must be able to show that their gross receipts were significantly impacted by COVID-19. This includes businesses that had to suspend operations due to government orders, as well as those that experienced an overall decline in revenue of more than 20%. Businesses must also provide proof that they did not lay off any employees between March 13, 2020 and December 31, 2020 in order to be eligible for the credit.

Eligible Wages

The ERTC applies only to wages paid to employees who are not providing services due to the impact of COVID-19. Wages include salary, wages, vacation pay, parental leave pay, and health insurance costs. Eligible wages also include wages paid to furloughed employees, but not wages paid to independent contractors.

Claiming the Credit

Businesses must claim the ERTC on their quarterly Form 941, Employer's Quarterly Federal Tax Return. The amount of the credit will be reported on line 9 of the form. If the credit is greater than the taxes owed for the quarter, the balance of the credit will be refunded to the employer. Businesses may also elect to apply the credit to their estimated tax payments for the current or subsequent quarters. The credit can be applied retroactively, so businesses that have already filed their Form 941 for the applicable quarter may still claim the credit.

Limitations of the Employee Retention Tax Credit

The ERTC does not apply to wages paid to employees who are not affected by the impacts of COVID-19. In addition, businesses cannot use the credit if they are eligible for other support such as the Paycheck Protection Program (PPP). Finally, the credit is limited to 50% of wages paid up to $5,000 per employee.

• Gross Receipts: Businesses must demonstrate that their gross receipts have decreased due to the impacts of the COVID-19 pandemic in order to qualify for the credit.
• Eligible Wages: Salaries, wages, vacation pay, parental leave pay, and health insurance costs are all eligible for the ERTC.
• Form 941: Businesses must use Form 941 to report the amount of the credit and to apply the credit to taxes owed or estimated taxes. The credit can be claimed retroactively.
• Limitations: The ERTC does not apply to wages paid to employees unaffected by COVID-19 or to businesses eligible for other forms of relief, and the credit is limited to 50% of wages paid up to $5,000 per employee.