What Is the Employee Retention Credit? A Small Business Guide

what is the employee retention credit
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Do you want to know what is employee retention credit and how it can help your small business? Like you, several small companies felt the heat of the pandemic. It caused many companies to close down and lose out on the revenue they needed to stay afloat.

Insert in the employee retention credit that paid employers to keep their employees. Although that program is over, you still have the opportunity to claim the tax credit so long as you meet the criteria and submit the proper documents. Continue reading below to learn more about this credit and who you can contact to help you make your claim.

What Is the Employee Retention Credit (ERC)

What is the employee retention credit? Your business can claim a refundable credit for certain health insurance costs and qualified wages paid to the employees.

Under the Cares Act 2020, eligible employers can claim 50% of qualified wages up to $7,000 per employee. You have the opportunity to claim this credit for wages paid between March 13th and December 31st, 2020. Even if you’ve claimed a PPP loan, you too can claim this credit.

What Employers Qualify?

Most employers qualify for this credit, including nonprofit organizations, colleges, and hospitals. There are a few factors each eligible employee must meet.

For example, their business had to have reduced hours or temporary suspensions due to government orders. Also, the credit only applies for a portion of the quarter, not the entire quarter.

It is possible for a company to still qualify even if they don’t meet the above factor. Instead, if a business has a significant decline in gross receipts, it may still claim the credit.

Who Does Not Qualify

It is important to note that even if your business closed down but was still able to continue operations via telework, you aren’t eligible. Essential companies also don’t qualify for this credit unless they had their goods or materials disrupted in a way that affected their operational ability.

What Wages Qualify?

Compensation or wages in general, in addition to health expenses, qualify when calculating the ERC. Your business must have paid these benefits after March 12th, 2020, and they qualify for the credit if they were paid through the end of September 2021. Your business can only take the credit on wages that are not forgiven or expected to be forgiven through the Paycheck Protection Program.

How to Claim the ERC

To apply for the small business ERC, you will need to use form 941 to report your total qualified taxes and health insurance costs for each quarter of the year. If you’ve already filed your employment tax credit form, you can file a 941-X which allows you to amend your previously submitted Form 941. In other words, if you already passed the relevant ERTC quarter but did not make a claim earlier in the year, you can use this form to update your tax returns.

Deadline for Tax ERC

Each year, you must submit Form 941 on the last day of the month following the end of the quarter. For example, if you plan to claim the ERTC in the first quarter, you must send in your information by April 30th for wages paid from January through March.

As mentioned earlier, if you need to amend your document, use Form 941-X to make your revisions. You have three years from the date you filed the original return.

What Businesses Should Know About Employee Retention Credit

Under Notice 2021-65, there are conditions that your business must meet to avoid a failure to deposit penalty. Also, any employer who reduced employment tax deposits in anticipation of receiving the tax credit in Q4 of 2021 before becoming ineligible due to early termination of the program must have their reduced deposits before or on December 20th, 2021.

Can You File PPP and ERTC in the Same Year?

In general, you cannot file ERTC and PPP in the same tax year. Employers who receive the small business interruption loan under the PPP cannot take the ERC.

Can You Include Sick Wages?

Your business is ineligible for the ERC credit if you received a tax credit for paid sick and family leave under the Coronavirus Response Act. The same goes for those wages counted as paid family and medical leave under section 45S.

Are Tipped Wages Included?

The Internal Revenue System advised that you can include tips in qualified wages if they are subject to FICA. In general, this means that if tips are over $20 in the employee’s calendar month, then all tips would be included in the retention credit. Tips less than $20 a month do not count towards the retention credit, nor is it subject to FICA wages.

What if I Used a Professional Employer Organization?

If you used a PEO, also known as a professional employer organization, they most likely filed the 941 on your behalf. Make sure you reach out to them and make them aware that you want to amend your 941-X. They should be able to provide you with information from your 941, so you can amend your report.

Apply for Your ERTC 

Now that you know what is the employee retention credit, it’s time to apply to receive your benefits! After the pandemic, many companies had to pivot and adjust to accommodate the changing climate, which hurt them financially in the process.

Thanks to the new IIJA bill, a small business can claim retroactive ERC credits to use for your business. Contact us now if you need help amending your 941-X form to ensure you get all the credits you deserve.

More Great Information For Employers:

Get Qualified For The ERC