Understanding the Basics of ERC

With so many businesses affected by the pandemic in 2020, the United States government stepped in to help. One way they helped was by introducing the Employee Retention Credit or the ERC. This tax credit can be a bit confusing especially if you are not a CPA.   

We wrote the guide below to share the ins and outs of the ERC, so that you can understand everything there is to know about this tax credit.

What Is the ERC?

The ERC is a refundable tax credit that allows your business to claim against payroll taxes. If your business is eligible, you can claim up to 70% of the qualified wages that you pay to your employees. The maximum amount your business can claim per quarter is $10,000 per employee. 

This equates to receiving up to $7,000 per employee per quarter. You can learn a bit more from erctoday.com, or similar sites, and keep up with the latest rules and deadlines for the credit. There are plenty of small businesses that don’t realize that they can file for the ERC in 2022.

How to Be Eligible for the ERC?

Employers are eligible for the ERC if they had to suspend their operations either 100% or part-time because of government orders due to COVID-19. A business is also eligible if they have seen a major decline in its gross receipts. This decline has to be 50% or higher in comparison to the same quarter in the previous year. 

The ERC can be claimed for eligible wages that were paid between March 13, 2020, through December 31, 2021. You can’t claim the ERC credit if you claimed those same wages for funds paid out via the Paycheck Protection Program. You can only claim wages that were not used for any other tax credits.

How Will the ERC Help Your Business?

You can offset a portion of your payroll taxes which is going to allow you to keep more cash to support other business operations. This can really give your business a huge financial relief and lift some stress and weight off your shoulders. You can also prevent layoffs because you will have the extra cash on hand.

How to Claim the ERC

Your business has to fill out the Employer’s Quarterly Federal Tax Return in order to claim the credit. This is also known as Form 941. You can claim it on the second quarter of 2021 form and beyond.

When you claim this credit, you are claiming against the businesses share of Social Security taxes or wages up to a certain amount. For Social Security taxes you can claim up to 6.2% of wages and for Medicare taxes, you can claim up to 1.45% of all wages. 

You can use the credit to help offset Medicare taxes, Social Security taxes, and federal payroll taxes. If the credit is more than the payroll taxes that you owe, then this excess amount can be refunded to your business.

Keep in mind that any sized business is eligible to claim the employee retention credit. Also, tax-exempt organizations are allowed to claim it. There are different rules for employers that have more than 500 employees. 

Businesses that have less than 500 employees, can then claim all the qualified wages as long as it was during the eligible period. Businesses that have more than 500 employees can only claim the wages that were paid to employees that were not providing services because of the COVID-19 pandemic. 

If your business did not take advantage of the employee retention credit during the eligible quarters in 2020, there might still be a chance. Speak with your accountant about filing an amended tax return and retroactively claiming the credit.

ERC Amount

The credit amount is completely based on how much you paid to qualified employees during the period that it was eligible to claim it. This credit is 70% of qualified wages during the period that your business was eligible to claim it. This makes the maximum credit you can claim for each employee $7,000.

During the first two quarters of 2021, the credit was increased to $14,000. This makes the maximum credit for the year 2021, $28,000 for the first two quarters. 

Feeling Like an ERC Pro?

As you can see the Employee Retention Credit can be a valuable resource for businesses that were struggling to keep their employees thanks to the pandemic. You can use the ERC to reduce your financial burden and keep your workforce, alleviating some of the stress that came with the pandemic. 

We hope that you were able to retain your best workforce and not lose them due to not having work available for them. We highly recommend consulting with your tax advisor to determine if you are eligible or not. 

If this article helped you out, make sure you continue browsing our business section for more tips.

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