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Employee Retention Credit – What you need to know

22 Aug 2023

Navigating through the intricacies of ERC is essential for every business aiming to benefit from this significant tax break.

So from understanding basic concepts and eligibility criteria, calculating your credits, to avoiding common mistakes, here’s everything you need to know about optimizing your use of ERC.

Understanding the Basics of Employee Retention Credit

The Employee Retention Credit, or ERC, represents a potentially valuable tax break for businesses. It is designed to encourage employers to maintain staffing levels during testing times like pandemics or economic downturns.

To simplify it, when a business keeps staff employed despite facing certain hardship, they become eligible for this substantial credit. You can get a more in-depth look at the ins and outs of the ERC by perusing this employee retention credit guide, but stick around and we’ll go over the fundamentals.

Criteria for Eligibility: Who can Benefit from Employee Retention Credit?

Not every business automatically qualifies for the ERC. To be eligible, your company should have either been partially or fully suspended due to a government order relating to COVID-19, or experienced a significant decline in gross receipts.

Also note that eligibility criteria might vary based on certain year-to-year adjustments. Understanding one’s eligibility is crucial before heading towards claiming this credit.

Guide to Calculating Your Employee Retention Credit

Figuring out the actual amount you can receive via the ERC involves some math. Here are a few key points to consider while making your calculations:

Define Applicable Wages: The total of direct cash payments and certain health plan expenses for an employee, subject to annual limits.
Consider Annual Revenue Downturns: For 2021, businesses that experienced over a 20% decline in quarterly gross receipts may qualify for greater credits.

Factor in Maximum Credit per Employee: Maximum credit varies per year – $5,000 per employee for 2020 and $28,000 for 2021.

Remember to keep detailed records of salaries paid during eligibility periods as it will enable smoother calculations.

Nuts and Bolts: The Process of Claiming Your Employee Retention Credit

Claiming the ERC is a multi-step process involving some administrative work. Here’s what it typically looks like:

File an Employment Tax Return: Assert your intention to claim the credit by filing suitable IRS forms (typically form 941 for businesses).
Reduction in Deposits: Decrease federal employment tax deposits you would otherwise be expected to deposit, up to the total eligible amount of your ERC.
Request for Advance Payment: If your anticipated credit exceeds what you’re allowed to withhold, submit Form 7200. This is especially relevant for small businesses.

Following these steps should help navigate through the claiming process with relative ease, although getting expert assistance is also an option.

Common Mistakes to Avoid When Applying for the Employee Retention Credit

When applying for the ERC, a few common pitfalls can sometimes trip employers up. Here’s what you should watch out for:

Eligibility Misunderstanding: Make sure you meet all criteria before submitting your claim.

Incorrect Calculations: Double-check wages and health plan expenses to avoid over or under claiming.
Duplicate Benefits: Be mindful of not claiming ERC on wages already accounted for through other COVID-relief programs like PPP loans.
Filing Errors: Ensure correct forms (941 or 7200) are used and filled out accurately with right quarters specified.

By taking care of these points, it’s easier than ever to apply for employee retention credits, and to get the support you need as a result.

Final Thoughts

Understanding and utilizing the Employee Retention Credit can lead to considerable tax savings for your business. Though it might seem daunting at first, staying updated on policy changes, and seeking professional advice when needed, you can ensure maximum benefit while remaining compliant with applicable rules.

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