The Employee Retention Credit – How do businesses qualify for one?

The CARES (Coronavirus Aid, Relief, and Economic Security) Act comprises a provision for business relief, called the ERC or Employee Retention Credit. The ERC is a refundable tax credit for authorized wages paid to full-time employees who have been retained from March 13, 2020, to Dec. 31, 2020. 

This step has been taken by the CARES Act in order to motivate employers in retaining employees, even though they have halted their work during the covered time period as a result of the COVID-19 pandemic. If you’re an employer who is wondering how to qualify for ERC, here are a few details you should keep in mind. 

A quick look at the outcome of ERS

  • After the updates to the ERC, it offers a refundable credit that is available for up to $5000 for each employee (full-time) whom you retained from March 2020 to Dec. 2020. This amount is up to $14,000 for each employee you retained from 1st Jan, 20221 to June 30, 2021. 
  • As an employer, you qualify only when you were asked to partially or fully wind up your business or when your receipts fell under 50% for that quarter (2020) and under 80% for 2021. 
  • You are allowed to claim the credit instantly by diminishing payroll taxes that are sent to the IRS. 
  • In case you were not involved in any business in 2019, you could utilize the quarters from the year 2020.
  • When the credit amount surpasses payroll taxes, you’ll be given a direct refund by the IRS.
  • As per the new law which got active in 2020, March, employers who receive PPP loans can claim the ERC for qualified wages. 

How does an employer qualify for ERC?

There are two different methods through which an employer can qualify for ERC.

Firstly, you need to have the required reduction in revenue for the quarter (2020 or 2021) that is eligible. Secondly, your business should have been suspended by the government. 

The test of decline in revenue is different in 2020 and 2021. As per 2020 rules, the decline in revenue should be 50% against the revenue in the same quarter in 2019. On the other hand, for the year 2021, the decline should be 20% for any quarter as against the same quarter in the year 2019. 

One more way of qualifying for the ERC is the full or partial business suspension under government orders. This test is complex. An employer has to check the orders of the government for each and every location in which he operates his business. By doing this, he has to conclude whether or not any noteworthy part of his business was either partially or fully suspended. 

Details required for determining qualification for ERC

  • Details of quarterly revenue
  • Detail by each employee of wages that were paid on their due date
  • Quarterly tax returns on payroll
  • Overview of business lines (services, products, and business lines)
  • Location of business employees and operations
  • Details of wages used for PPP

If you’re an employer reading this post, do you think you qualify for ERC? If you do, do the needful in order to claim your tax credit. 

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