When you file an annual tax return for your business, there are several tax credits of which you may take advantage. But, what are these credits, and what does the Employee Retention Credit mean for you—as a business owner or manager? Review these tips so you know the sort of credit you’re taking and how it functions compared to the manner in which your company is run.
What is the Employee Retention Credit?
The Employee Retention Credit is a tax credit provided by the U.S. government to eligible employers who have experienced a significant decline in revenue or were subject to full or partial suspension of their business operations due to the COVID-19 pandemic. This credit is designed to encourage businesses to retain and continue paying their employees during these challenging times. It is available for wages paid between March 13, 2020, and December 31, 2021. The credit amount is up to 70% of qualified wages paid to employees, with a maximum credit of $7,000 per employee per quarter. Eligible employers can claim this credit on their quarterly employment tax returns or can request an advance payment from the IRS.
Who Qualifies for the Employee Retention Credit?
Your business qualifies for the Employee Retention Credit given basic criteria, irrespective of size. This includes tax-exempt entities, with only a few exceptions:
- State and local governments along with their instruments do not qualify
- Small businesses who take small business loans do not qualify
To qualify for the credit, you must meet 1 of 2 quarterly tests:
- Your business was suspended by a government order due to COVID during that quarter
or
- Gross income is down 50% from the same quarter in 2019. Once your income rises above 80% compared to the same quarter in 2019, you no longer qualify.
Calculating Your Employee Retention Credit
Calculating the ERC credit is based on wages paid to employees during the eligible periods (Q2 2020 through Q3 2021).
Eligible Wages paid in 2020 are covered 50% up to $10,000 per employee for the year. (for a total of $5,000 potential)
Elligible Wages paid in 2021 are covered 70% up to $10,000 per employee per quarter (for a total of $21,000 potential)
Payment of the Employee Retention Credit
Employers are reimbursed for this tax credit with a reduction of the overall amount of payroll taxes they must withhold and are required to deposit with the Treasury.
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Frequently Asked Questions
What is the meaning of a tax credit?
A tax credit is offered to businesses and individuals as a way to reduce their taxable income for that year.
What is a tax credit vs a refund?
A tax credit reduces the taxable income of a business or individual. A tax refund is the amount of money paid back to you when you file your tax return—if you’ve overpaid.
About Patton Hunnicutt
Patton Hunnicutt is a contributor and editor at Benzinga. He’s worked for several years on financial content, addressing issues related to personal finance, investments, retirement, and more.