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How Does The Employee Retention Credit Work?

Did your business suffer during the COVID-19 lockdowns? Did you struggle to retain your employees due to market struggles? If so, there may be a way to gain compensation.

In 2020, the federal government authorized the Employee Retention Credit. This credit incentivized businesses to retain many employees on their payroll. This way, employers could afford to continue paying their workers.

However, many employers still struggle to understand the Employee Retention Credit. This problem has worsened since the ERC expired on September 30, 2021.

But, employers can still benefit from this credit even after its expiration! We’ll explore how that works in this guide below.

Employee Retention Credit And The CARES Act

The ERC stems from the CARES Act, which passed through Congress as a relief measure for companies. This fully refundable tax credit allowed eligible employers to keep employees and claim additional funds.

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Employers could also qualify for this credit alongside PPP loans. You can learn more about this at https://erctoday.com/ppp-and-erc-eligibility/.

Initially, this provision was only supposed to last through 2020. However, the Consolidated Appropriations Act (CAA) expanded this credit in December 2020.

In November 2021, President Biden signed the Infrastructure Investment and Jobs Act. This new legislation retroactively ended the retention credit, albeit with a few exceptions.

How Much Is The Employee Tax Credit

At first, the CARES Act stipulated that the ERC was equal to 50% of the wages that companies paid their workers. The original credit covered wages paid from March 13, 2020, to December 31, 2020.

However, the CAA changed this. Qualified employers in 2021 could claim the tax credit for 70% of their qualified wages.

This new figure brought an increased qualifier for wages. The CAA ensured that employers could use the employee tax retention credit for $10,000 per employee. This new figure extended to each quarter of 2021.

The most credit a full-time employee could qualify for per quarter was $7,000. Employers can calculate the exact quantity using this equation:

$10,000 in qualified wages per quarter x 70%

Remember to multiply this by the number of full-time employees you have. Otherwise, your final sum will be significantly inaccurate.

How Do the Employee Retention Tax Credit Determine Qualified Wages?

The ERC qualifies wages and compensations companies pay employees during the eligible time frame. This includes health plan expenses and benefits associated with your workers’ salaries.

The ERC also determines qualified wages by considering how many full-time employees you had in 2019. Companies with less than 100 such employees in 2019 could claim the ERC on all full-time salaries paid during the 2020 qualifying period.

The CAA increased the small business threshold from 100 full-timers to 500. So, employers with 500 full-time workers in 2019 can claim this tax credit for 2021 wages.

Claiming The Retention Credit

Businesses can claim the ERC on their federal tax returns. Generally, you can claim the credits on Form 941, the Employer’s Quarterly Federal Tax Return. You can amend your Form 941 if you discover they qualify for the credit.

Discover More About The ERC

As you can see, the employee retention credit can significantly benefit businesses in retaining their employees. The savings from this credit can help your business compensate for lost wages during the worst of the COVID pandemic.

So, continue researching to discover more ways this credit can benefit your business! You may learn that you qualify for more money than you realized.

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