The ERC is equal to 50% of qualified wages paid by the employer, up to $10,000 per employee.
Qualified wages include salary, hourly pay, and other forms of compensation. Health insurance costs are not included in the calculation of qualified wages.
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What is the ERC tax credit?
The Employee Retention Credit (ERC) is a refundable tax credit for eligible employers that retain their employees during the COVID-19 pandemic. The credit is available for qualified wages paid after March 12, 2020, and before January 1, 2023. In order to claim the credit, employers must have experienced either a full or partial suspension of operations due to a government order related to COVID-19, or a significant decline in gross receipts.
The ERC is equal to 50% of qualified wages paid by the employer, up to $10,000 per employee. Qualified wages include salary, hourly pay, and other forms of compensation. Health insurance costs are not included in the calculation of qualified wages.
To claim the credit, employers must file Form 941, Employer’s Quarterly Federal Tax Return, for each quarter in which they wish to claim the credit. For 2021 only, eligible employers may elect to receive advance payments of the credit from the IRS by reducing their federal tax deposits in anticipation of claiming the credit on their return.
The ERC is available for all employers regardless of size, including nonprofit organizations and government entities. Sole proprietorships, self-employed individuals, and partnerships are also eligible for the credit.
How do I claim the ERC tax credit for 2022?
Employers can claim the ERC on their quarterly Form 941 employment tax return. The credit can also be claimed on an amended return for any quarter in 2022. If you have already filed your 2022 return and did not claim the credit, you can file an amended return to claim the credit retroactively.
If you are not required to file Form 941, you can claim the credit on your annual Form 940 return. You can also elect to receive advance payments of the credit from the IRS by submitting Form 7200.
There are two ways to claim the credit:
- Reduce your deposit of employment taxes that you would otherwise pay to the IRS. You can reduce your deposits by the amount of your expected credit for the quarter.
- Request an advance payment from the IRS by submitting Form 7200. You can request an advance payment for each quarter in which you expect to be eligible for the credit.
If you reduce your employment tax deposits, you must notify your payroll service provider or other third-party payer so that they can reduce their deposits accordingly.
You cannot claim the ERC if you received a Paycheck Protection Program (PPP) loan and elect to have it forgiven. However, you may be eligible for both the ERC and PPP if you first use your PPP loan proceeds for qualifying expenses and then use any remaining proceeds for other allowable uses such as payroll costs not used for forgiveness purposes.
The Employee Retention Credit is a valuable tax credit for small businesses that have been impacted by COVID-19. If you think you may be eligible for the credit, be sure to follow the instructions above so that you can claim it on your quarterly employment tax return. For more information about this and other tax credits available to small businesses, please visit our website or give us a call. We’re here to help!