The employee retention credit is a tax incentive that is available to small business owners. It is based on a percentage of gross receipts and is a great way to improve your business. But, how do you qualify for the credit?
Calculate eligibility based on past quarter gross receipts
The Employee Retention Credit (ERC) is an advanceable tax credit that allows businesses to claim a refund of wages owed to employees for not providing services. Businesses can qualify for the ERC if they have experienced a significant decline in gross receipts.
During a quarter, a business may qualify for the Employee Retention Credit if it has seen a more than 20% drop in gross receipts. In addition, the business must have paid employees during the quarter. It is important to know how to calculate eligibility for the ERC.
The amount of the ERC varies according to the calendar year. For instance, the credit for 2021 is available to qualifying employers who have paid qualifying wages during the quarter from March 13, 2020, through September 30, 2021.
To calculate eligibility, businesses should enter the gross receipts for each calendar quarter from the beginning of the calendar year through the end of the calendar year. Companies should leave the field blank if the quarter is a non-operational one.
Gross receipts are the total amount of revenues collected during the accounting period. They include the cost of products sold, the amounts received from advertising agents and other sources, and proceeds from transactions between domestic and foreign affiliates. However, the receipts do not include investment income, employee-based expenses, and net capital losses.
Determine if your business has a partial suspension of business operations
If your business has been forced to suspend operations, you may be wondering if you qualify for the Employee Retention Credit. This credit is available to employers who suffer a reduction in gross receipts as a result of a government order. The amount of money you can claim is up to $26,000 per qualified employee.
The IRS has issued several FAQs on this topic. These include the following:
ERTC employee retention tax credit does not cover all situations. Businesses that operate only in a single jurisdiction, or those with a nominal effect on their operations, will not qualify for this credit. Moreover, the impact of a governmental order on a business is often indirect. For example, a governmental order requiring deep cleaning of a food processing facility on a regular basis is not a good reason for a business to be considered to have been suspended.
There are many factors that go into the determination of whether or not your business qualifies for this credit. One of the most important is the ERC shutdown test. Basically, if you are operating during a time when the business is suspended because of a governmental order, you are eligible for the credit.
The IRS has provided limited guidance on this topic, but it is expected that more information will be released in the near future. As such, businesses wishing to file for the credit should consult their tax advisors before filing.
Claim the credit
Employee Retention Credit is a federal tax credit that is designed to help small businesses retain their employees. The credit is administered by the IRS and is intended to encourage employers to maintain their current workforce. It does not require repayment and is a fully refundable credit.
To be eligible, an employer must have at least 100 full-time employees and pay qualified wages. Qualified wages include salaries, wages paid on other days off, and health plan costs. During the first two quarters of 2021, each employee can claim a maximum of $10,000.
In addition, an employer must have suffered a significant decline in gross receipts. This means less than 20% of the gross receipts in the 2019 quarter.
To calculate the total credit, a taxpayer should use Form 941-X, the Modified Employer’s Quarterly Federal Tax Return. For new businesses, the gross receipts from the first quarter of the year serve as a reference point. If the gross receipts in a quarter were reduced by more than 20%, the business may qualify for the ERC.
While Employee Retention Credit does not directly offset income taxes, it does reduce the amount of social security and Medicare taxes paid by the employer. In addition, eligible employers can retain the employers’ share of these taxes. Moreover, employers that have insufficient employment tax deposits can request advance payment from the IRS.