If you’re an eligible employer or tax-exempt entity you may be able to claim the employee retention credit (ERC). It is a tax-free credit that will lower your tax burden in 2020 and 2021.
ERC eligibility is determined by certain factors, including the amount of wages that employees receive during the ERTC period as well as the number of employees. You must have at least 500 full-time employees in order to be eligible for the credit.
For companies with less than 500 full-time employees, an advance payment of ERTC can be made by filing IRS Form 7200. This is a great option for smaller businesses as the credit is typically more than offset by a portion the business’s income tax.
However, the ERTC is subject to specific rules and regulations, and you need to have appropriate documentation for every aspect of your business operations. This includes ensuring that you have an updated payroll, the proper number of employees, and accurate reporting.
The credit can be applied to 70 percent of wages that are eligible for payment to employees during the ERTC period If you qualify. This means you can get a maximum credit up to $7,000 per employee.
You can also make use of the credit to offset federal tax benefits. For example the credit can be used to offset Social Security and Medicare taxes. The credit also can be used to offset the Railroad Retirement Act and the Employer’s Share of Health Insurance Costs.
The IRS also has additional rules for the claim of the ERTC. You must ensure that you have a valid claim to the ERTC and that this credit is not being utilized in conjunction with other stimulus programs.
You should also know that the ERTC eligibility is only applicable to your earnings for 2020 and 2021 and you aren’t able to claim it against other deductions or taxes that are applicable to other years. If you are unsure about your ERC eligibility, a certified accountant or payroll provider can help determine if this tax credit is suitable for your company.
My company has received a PPP loan however, is it eligible for the ERTC?
The CARES Act, and the Consolidated Appropriations Act brought about several welcome changes to the ERTC. Particularly, they permit some employers that took PPP loans to make use of the credit. The Consolidated Appropriations Act also made some adjustments that broadened the credit to include Recovery Startup Businesses and severely distressed companies.
Can I avail the ERTC while waiting for my PPP forgiveness application to be approved?
The IRS is currently working on finalizing its rules on how to combine the ERTC and PPP loan forgiveness programs. As of December 2020, it will be possible to be combined for small businesses, as long as the PPP application is approved.
The program was established as part of the CARES Act in 2020 and expanded under the Consolidated Appropriations Act in 2021. This means that the ERTC is scheduled to be in operation for all of 2021 until it is canceled by the Infrastructure Investment and Jobs Act.
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