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(From the Financial Literacy Blog) – Due to the pandemic negatively affecting businesses, many employers and employees alike have been faced with hard times. In an effort to provide businesses with relief, there have been a number of government-funded loans and grants made available. While assistance programs like the Restaurant Revitalization Fund and the Paycheck Protection Program have become well-known, there are others that Maine businesses may be able to take advantage of. One of them is the Employee Retention Tax Credit.
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) was originally established within the CARES Act in March of 2020. The objective of the credit was to incentivize employers to keep their employees on payroll, despite the struggles of navigating the effects of the pandemic. The Consolidated Appropriations Act and the recent American Rescue Plan Act have both extended the deadline and further expanded eligibility. The most recent version of the ERTC allows eligible businesses to claim the credit on qualified wages paid to employees, such as payroll and health insurance costs. Eligible Maine business owners can claim a credit against 70% of qualified wages paid to each employee, up to $10,000 per employee each quarter. If an employee earned $10,000 or more in wages per quarter, the employer would get a credit of $7,000, as that is 70% of $10,000. This means a maximum of $28,000 per employee can be credited to the employer in 2021. This tax credit is especially beneficial because it’s not a loan and recipients will never need to repay or seek forgiveness for the credited funds.
Which employers qualify for the tax credit?
In order for a business to qualify for the tax credit, the employer’s operation needs to have been fully or partially suspended due to a pandemic-related governmental order; or the employer needs to have experienced a significant decline in gross receipts (all of the money a business takes in, before expenses and taxes are deducted) as a result of the pandemic. The American Rescue Plan Act determines a significant decline to be more than a 20% drop in quarterly gross receipts compared to that same quarter in 2019.
How do employers claim the tax credit?
Businesses do not need to fill out an application for the ERTC. Instead, employers claim the credit on their federal employment tax returns—usually on Form 941. The employer can reduce its payroll tax deposits by the amount of the credit. If the credit amount is greater than the tax deposits made during the quarter, the extra amount will be refunded. If an employer received a PPP loan, the business can still claim the ERTC using Form 941-X, but only for qualified wages that were not counted toward PPP loan forgiveness. An employer can confirm its eligibility and how they would file for the ERTC by visiting the Internal Revenue Service’s (IRS) website. The ERTC section of the IRS website further highlights qualified wages, how to claim the credit, what impact the credit may have on other relief provisions, and how to retroactively claim the credit for 2020. Additionally, to ensure compliance and that eligible Maine businesses are fully taking advantage of the tax credit, employers with questions are encouraged to contact a tax professional.
If you’re a small business owner here in Maine, contact your local credit union to see how they can help you throughout the pandemic and beyond.