April 20, 2023 | General ERC Info
How to Apply for the Employee Retention Tax Credit
As a result of the COVID-19 pandemic, many businesses have suffered significant losses and are struggling to keep their doors open. To help alleviate this burden, the U.S. government has introduced several relief measures, including the Employee Retention Tax Credit (ERTC). This tax credit is designed to encourage businesses to keep their employees on payroll […]
As a result of the COVID-19 pandemic, many businesses have suffered significant losses and are struggling to keep their doors open. To help alleviate this burden, the U.S. government has introduced several relief measures, including the Employee Retention Tax Credit (ERTC). This tax credit is designed to encourage businesses to keep their employees on payroll and can be a valuable source of financial relief. In this blog post, we will discuss how to apply for the Employee Retention Tax Credit.
Step 1: Determine Eligibility
Before you can apply for the ERTC, you need to determine whether your business is eligible. Generally, businesses that experienced a significant decline in revenue due to the pandemic may qualify for the credit. Specifically, eligible businesses include those that:
- You have W-2 Employees
- Experienced a full or partial suspension of operations due to a government order related to COVID-19
- Experienced a significant decline in gross receipts during any quarter in 2020 or 2021 (compared to the same quarter in 2019)
- Have less than 100 full-time employees in 2020 and under 500 full-time employees in 2021. (Please note if you do have over this amount you can still claim ERTC, but in a different way).
If you meet these eligibility criteria, you can move on to the next step.
Step 2: Calculate the Credit Amount
The ERTC is a refundable tax credit that can be claimed on the employer’s quarterly payroll tax return. In 2020, The credit amount is equal to 50% of qualified wages paid to employees during a calendar quarter, up to a maximum of $10,000 per employee per quarter. This means that the maximum credit amount per employee is $5,000 per quarter. However, 2020 is capped at $5,000 per W-2 employee for the entire year.
In 2021, the credit amount is equal to 70% of qualified wages paid to employees during a calendar quarter, up to a maximum of $10,000 per employee per quarter. This means that the maximum credit amount per employee is $7,000 per quarter. For businesses started before February 15, 2020, only the first 3 quarters of 2021 are available. Therefore, the maximum available in 2021 is $21,000 per W-2 employee.
To calculate the credit amount, you need to determine the qualified wages paid to each eligible employee during the applicable quarter. Qualified wages include both cash compensation and the cost of employer-provided health care benefits.
Nevertheless, the presence of any forgiven PPP loans can significantly impact your calculations and the amount you’re eligible to receive. The complexity of the ERC increases when accounting for PPP, and seemingly small errors or unfamiliarity with IRS guidelines could potentially cost you tens or even hundreds of thousands of dollars. As such, it is strongly recommended to consult a highly qualified ERTC expert, such as those at www.erc-funding.com, to ensure you’re maximizing your benefits.
Step 3: Claim the Credit
To claim the ERTC, you will need to amend Form 941, Employer’s Quarterly Federal Tax Return. The credit is claimed directly on Form 941 for the applicable quarter. If the credit amount is greater than the employer’s payroll tax liability for the quarter, the excess credit can be claimed as a refund.
It’s important to note that if you claimed a Paycheck Protection Program (PPP) loan, you may still be eligible for the ERTC. However, you cannot claim the credit on wages that were paid for with PPP loan funds. In other words, you cannot double-dip and claim the same expenses for both the PPP loan forgiveness and the ERTC.
Step 4: Keep Accurate Records
To support your ERTC claim, you must maintain accurate records of the qualified wages paid to each employee during the applicable quarter. You should also keep records of any government orders or other documentation that supports your eligibility for the credit.
Step 5: Seek Professional Assistance
The ERTC can be complex, and there are many rules and regulations to follow. To ensure that you are maximizing your credit and complying with all requirements, it’s a good idea to seek professional assistance. You can work with a tax professional or accountant to help you navigate the process and avoid any potential pitfalls.
In conclusion, the Employee Retention Tax Credit can be a valuable source of financial relief for businesses that have been impacted by the COVID-19 pandemic. If you meet the eligibility criteria, you can calculate the credit amount, claim the credit on Form 941, and keep accurate records to support your claim. Remember to seek professional assistance if you need help navigating the process.