What is the Employee Retention Credit (ERC), anyways?
The ERC is a tax credit provided by the federal government to help employers cover the cost of retaining employees during the COVID-19 pandemic. It was created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and was later expanded under the Consolidated Appropriations Act of 2021.
The ERC provides eligible employers with a credit equal to 50% of the qualified wages paid to employees during certain periods, up to a maximum credit of $10,000 per employee per year. The credit can be used to offset the employer’s portion of Social Security taxes and can be claimed on the employer’s quarterly employment tax returns.
Keep reading for additional insights into the ERC. And if you find yourself in need of assistance, feel free to reach out to the experts at Northstar for professional guidance.
Who is Eligible for the ERC?
ERC eligibility is a crucial consideration for anyone considering applying. To be eligible for the ERC, an employer must have been fully or partially suspended from operating due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 pandemic, or have experienced a significant decline in gross receipts.
Eligible employers also must have fewer than 500 employees, including full-time and part-time employees. For employers with more than 100 employees, the credit is only available for wages paid to employees who are not providing services because of the circumstances described above.
Ultimately, employers interested in taking advantage of the ERC should review IRS guidance or seek professional guidance to determine if they meet all of the requirements.
Loving this post? Make sure to check out our other article about filing your Employee Retention Credit before you leave!
Limitations of ERC
ERC comes with several limitations and restrictions worth noting, including:
- The credit is only available for wages paid from March 13, 2020, through December 31, 2021.
- The credit is only available for wages paid to employees who are not owners of the company, and the credit is capped at $10,000 per employee per year.
- The credit is not available for wages that are taken into account for purposes of the Families First Coronavirus Response Act (FFCRA) tax credits.
While limitations of ERC exist, it remains a powerful way for eligible employers to retain their workforce and lessen the financial burden on businesses during these unprecedented times.
If you have any questions about how to apply for ERC or would like assistance calculating the credit, contact Northstar today. Our team of experienced CPAs is here to provide expert guidance every step of the way.
How to Claim Employee Retention Credit
Claiming the ERC is done by filing form 941, Employer’s Quarterly Federal Tax Return, or form 944, Employer’s Annual Federal Tax Return, as appropriate. The form should be filed with the appropriate amount of the credit claimed, and the credit will then be applied against the employer’s liability for Social Security taxes.
Claiming the ERC is not complicated, but it’s important to get it right. The IRS offers detailed guidance and instructions on how to properly claim the credit. However, Northstar can provide personalized advice and assistance with calculating and claiming the credit on your quarterly or annual tax returns.
Forms & Instructions
Form 941 and form 944 can be found on the IRS website, along with instructions on how to claim the ERC. Employers should carefully review the instructions and guidelines before filing the form to ensure that they are claiming the credit correctly.
Mistakes on the form could lead to delays in getting the credit, and employers should make sure they are familiar with the form and how it works before submitting it. Employers who need assistance can always consult a professional tax advisor or reach out to Northstar for help.
Third-Party ERC Schemes to Watch Out For
Employers should be cautious of third-party schemes that promise to help them claim the ERC, as some of these schemes may not be legitimate. The IRS has issued warnings about these schemes and has advised employers to be wary of anyone who promises to help them claim the credit for a fee.
Third-party ERC schemes are typically aimed at small businesses, and employers should always verify the legitimacy of any third-party offering such services.
In some cases, employers may be eligible for penalty relief if they are unable to pay their employment taxes on time due to circumstances related to the COVID-19 pandemic. Employers who believe that they may be eligible for penalty relief should contact the IRS for more information.
Penalty relief is also available for employers who overclaim the ERC or make other errors in claiming the credit. Employers should review their claims carefully to ensure accuracy and seek assistance from a professional if needed.
Closing on Employee Retention Credit
The Employee Retention Credit is a valuable resource for employers who are facing economic challenges due to the COVID-19 pandemic. By understanding the eligibility criteria and limitations of the credit, employers can determine if they are eligible and can take the necessary steps to claim the credit and use it to help cover the cost of retaining their employees.
Ultimately, our clients find that the ERC is a helpful tool in managing the financial burden of this pandemic. However, establishing your eligibility is essential to ensuring that you get the most out of this credit.
Northstar’s team of experienced CPAs can help ensure that your business takes advantage of all available credits and deductions to lessen the impact on your bottom line. Contact us today for personalized advice and guidance with claiming Employee Retention Credit.