Understanding the Employee Retention Tax Credit (ERTC)

Blog Introduction: As a small business owner, you have likely faced many challenges in the past year. One of the most significant difficulties has been the impact of COVID-19 on your operations, including your employees. The Employee Retention Tax Credit, or ERTC, was introduced as a measure to support small businesses during this difficult time. In this blog post, we will go over the basics of ERTC, how it works, and how it can benefit your business.

What is the Employee Retention Tax Credit?

The Employee Retention Tax Credit is a refundable tax credit designed to encourage businesses to retain their employees during the COVID-19 pandemic. The credit is calculated as a percentage of each employee's wages and is capped at $5,000 per employee for 2020. For 2021 it is $7000 for the first 3 qtrs. Employers can claim the credit for wages paid between March 12, 2020, and December 31, 2021.

How does the ERTC work?

To claim the Employee Retention Tax Credit, the employer must meet specific criteria. First, your business must have experienced either a full or partial suspension of operations due to a government order related to COVID-19, or your gross receipts for any quarter in 2020 must have been less than 50% compared to the same quarter in 2019. Second, your business must have continued to pay employee wages during the period of the suspension or the quarter with reduced gross receipts, or you must have paid wages to employees who were unable to work due to COVID-19 related reasons.

How can ERTC benefit your business?

The Employee Retention Tax Credit can provide significant financial relief to small businesses during this challenging time. The credit can be used to offset payroll taxes, including federal income tax, Medicare tax, and Social Security tax. This can result in significant savings for small businesses, especially those with a limited cash flow.

What do you need to do to claim the ERTC?

To claim the Employee Retention Tax Credit, you must file Form 941 – the quarterly payroll tax return – with the Internal Revenue Service (IRS). However, claiming the credit can be complex, and you may need the assistance of a tax professional to ensure that you comply with all the requirements. It is also worth noting that if you received a Paycheck Protection Program (PPP) loan, certain limitations may apply when claiming the tax credit.

The Employee Retention Tax Credit is an essential measure that can provide significant financial relief to small businesses. However, it is essential to note that claiming the credit can be complex, and you may need the assistance of a tax professional. Ensure you comply with all the requirements and regulations when applying for the ERTC to avoid any complications or penalties. As always, consult with a tax expert or your business advisor before making any decisions or taking any actions.