The Employee Retention Credit, also known as the ERC, is a useful tax credit that was meant to assist businesses who are struggling financially as a direct result of the COVID-19 pandemic. The ERC is meant to encourage businesses to keep employees on their payroll despite the financial difficulties caused by the pandemic. In this step-by-step guide, we will walk you through the process of applying for the ERC, from determining your eligibility to submitting your claim.
Step 1: Determine Eligibility
To qualify for the ERC, businesses must meet specific eligibility criteria. The conditions for eligibility include a large drop in gross income or an order from the government to shut down the government’s operations, either of which precludes the business from operating at full capacity. To determine if your business is eligible, you will need to review the eligibility criteria for each quarter that you are claiming the credit, as the criteria may change. The eligibility criteria are detailed in IRS Notice 2021-20 and Notice 2021-23.
Step 2: Calculate the Credit Amount
Once you have determined that your business is eligible for the ERC, you will need to calculate the credit amount. The credit amount is calculated based on the number of eligible employees and the maximum qualified wages per employee. The credit rate is also a crucial factor in the calculation. The credit rate is 50% of qualified wages up to $10,000 per employee per eligible quarter. The maximum credit per employee for all quarters is $28,000.
Step 3: Claim the Credit on Tax Returns
The ERC is claimed on quarterly employment tax returns, such as Form 941. Businesses must also report the credit on annual tax returns, including Form 8974. It’s essential to understand the reporting requirements and to file the correct forms accurately and timely. The IRS has issued guidance on how to report the ERC on Form 941 and Form 8974.
It’s important to note that the ERC is a refundable tax credit. This means that if the credit amount is larger than the taxes owed, the excess credit will be refunded to the business.
Step 4: Gather Required Documentation
To support the claim for the ERC, businesses must maintain proper documentation, such as payroll records and financial statements. The documentation should support the calculation of the credit amount and the eligibility criteria. It’s important to organize and maintain documentation, as the IRS may request it during an audit.
Step 5: Submit the Claim
Once eligibility is determined, the credit amount is calculated, and the required documentation is gathered, the business can submit the claim for the ERC. Businesses can claim the credit on their quarterly tax returns, such as Form 941. If an amended return is necessary, the business must follow the proper procedures to amend the return.
Applying for the ERC can be a complex process, but by following the steps outlined in this guide, businesses can apply for the credit with confidence. Proper record-keeping, accurate calculation of the credit amount, and professional guidance are essential to ensure a successful ERC claim. The ERC is a valuable tool for businesses struggling during the pandemic, and businesses should take advantage of this credit to help retain their employees and survive these challenging times.