In January 2020, the US experienced an unemployment level of 3.6%. At the time, it was one of the lowest levels that the country had seen in 50 years. In February 2021, however, there were 8.5 million fewer people employed than in February 2020.
The reason for this drop in employment is simple. The COVID-19 pandemic and the responses of the federal, state, and local governments have caused many businesses to close or downsize.
To counter this and minimize the damage, the federal government passed the CARES Act. This act includes the many benefits of the Employee Retention Tax Credit. There are many ERC benefits that can help your company.
What are some of those benefits? How can your company apply for the tax credit under CARES?
If you’re asking these questions, don’t worry. We’ll explore the top six ERC benefits in the guide below.
What are the ERC Benefits?
The Employee Retention Tax Credit allows companies to take a 70% tax credit of up to $10,000 of an employee’s qualifying wage each quarter in 2021. The maximum credit for each quarter caps at around $7,000 for each employee.
In 2020, the refundable credit was a 50% tax credit of up to $5,000 of an employee’s wage for the year. In short, this tax credit can save your company a significant amount of money in taxes.
1. The ERC Lowers Social Security Tax Liability
The ERC lowers an employer’s Social Security tax liability. How does this work?
If the credit you receive through the ERC exceeds your Social Security tax liability, you qualify for a refund. At the end of the quarter, the amount of these credits becomes reconciled on the employer’s Form 941.
2. The Credit Has Been Extended to 2021
Since the pandemic continues to affect businesses in some regions, the federal government decided to expand the Employee Retention Tax Credit into 2021. Fortunately, it expands into all four quarters of the year.
This extension gives businesses several new benefits. For example, the 2021 update is the reason that employers can now receive 70% of the first $10,000 of qualified wages for each employee.
Likewise, the 2021 expansion now includes the employer’s portion of Medicare taxes for the third and fourth quarters. It has also expanded on the definition of an eligible employer to encompass a new category. This new addition is called the “recovery startup business.”
3. Many Businesses Can Apply for Tax Credit Benefits
Who can qualify for the Employee Retention Tax Credit? The CARES Act specifies two qualifying conditions for companies.
First, a company must have suffered either a full or partial suspension due to government orders. Alternatively, a company must have suffered a significant decline in gross receipts.
In the 2020 ERC qualifications, significant decline required you to experience a decline of 50% for a quarter. In 2021, the qualifications are a little more flexible.
Instead, the 2021 criteria stipulate that you must face a decline of more than 20%. Employers should compare their current quarterly revenue to the same quarter in 2019 to determine if they qualify.
4. You Can Claim ERC for Many Employees
Different-sized businesses can claim the Employee Retention Tax Credit for varying numbers of employees. A small employer, for example, can claim ERC on all its employees’ wages. The CARES Act defines a small employer as somebody with 100 or fewer workers.
If you have more than 100 employees, you can calculate and still claim an Employee Retention Tax Credit on some of your employees. However, those employees must fall under the “not working” classification.
What does this entail? Unfortunately, this could take several forms. To get the best understanding of the full procedure, you should consult a professional advisor.
Regardless of which type of business you run, these retention credits are a tremendous benefit for your company. Consult your professional advisors to see how the number of employees may affect how you take a tax credit.
5. It’s Easy to Claim the ERC
Another benefit of the ERC is that you can claim it easily if you qualify. All you have to do is claim it on your federal employment tax returns with your Form 941.
You may not have realized that you qualified for this refund on your Employer’s Quarterly Federal Tax Return. If so, don’t worry. You can amend your Employer’s Quarterly Federal Tax Return on Form 941-X if you have determined that you did qualify for the ERC.
Different types of businesses may have other ways of claiming credit. For example, some companies can claim the credit on Form 944 on their Employer’s Annual Federal Tax Return.
If you run an agricultural business, you could also claim the credit on Form 943, the Employer’s Annual Federal Tax Return for Agricultural Employees. Investigate what options might be available for your type of business.
6. Many Sectors Can Claim the Tax Credit
One of the final advantages of the Employee Retention Tax Credit is one we’ve alluded to previously. The IRS has outlined criteria for determining whether businesses can qualify in different sectors. These include private-sector organizations, tax-exempt entities, and nonprofit groups.
Government entities, such as colleges and universities, may be eligible for the credit. Lastly, businesses specializing in healthcare can also receive tax credits.
Key Takeaways & Top 10 ERC Benefits
- Increases the ability to retain existing employees
- Enhances employee morale and productivity
- Offers financial stability for employers during difficult times
- Can provide tax incentives that don’t reduce worker incomes
- Helps companies remain compliant with local, state, and federal regulations
- Funds can be used to pay for retirement plans or other employee costs
- Makes it easier to keep track of employee accounts and their contributions over time, allowing employers to plan better for the future
- Reduces employer penalties for missing payroll taxes
- Removes the burden of having to find replacements for employees who leave their jobs due to economic hardship
- Gives employees more control over their own retirement funds
Discover if You Qualify for the Tax Credit
As you can see, there are several benefits of the Employee Retention Tax Credit. All you have to do is determine if you qualify.
To get started, consider working with us. We specialize in helping people navigate the procedures and eligibility requirements for this tax credit.
If you decide that you may qualify, apply for tax credit today. We can give you the information you need.