Understanding the Employee Retention Tax Credit Program
The world has been through a rough couple of years, and things are yet to pick back up. What started with the Covid -19 pandemic has stretched out to record-high inflation, putting considerable strain on businesses and individuals alike. The duration and severity of the pandemic forced many emergency measures that had disastrous effects on all economic activity, forcing closures, layoffs, and significant overall losses.
As part of the government’s efforts to try and ameliorate the far-reaching effects of the pandemic, the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law. Some of the provisions contained in this initiative were the PPP (Payroll Protection Program) and the ERTC (Employee Retention Tax Credit Program). Initially, employers had to choose between one or the other, but the Consolidated Appropriation Act came along and changed things to make enterprises eligible for both.
Because of some of the complexities regarding the ERTC program and the lack of knowledge among employers that might qualify for the program, it will be useful to take a closer look at the program, highlighting what it’s all about, who qualifies for it, how it works, and whether it might be an ideal solution for you.
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How the Employee Retention Tax Credit Program Works
The ERTC is not a loan or grant. Money will come directly from the government into the pockets of eligible business applicants. This refundable tax credit allows employers to receive a maximum amount of $26,000 from the IRS in the form of a check written to the qualifying business. This is arrived at by combining the $21,000 limit for 2020 with the $5,000 limit for 2021.
It’s important to note that the ERTC tax credit is only accessible to businesses, not individuals, regardless of their professions. The plain fact of it is that a company will only be eligible for the ERTC tax credit if it has employees on its permanent payroll (complete with W2s). This criterion excludes contractors and casual workers from the bracket of eligibility.
Don’t confuse the ERTC with the tax deductions you might be more familiar with. Instead of reducing the taxable income of a business, this facility works by subtracting the credit from the amount they owe in taxes, regardless of any other tax liabilities they may be exposed to.
Who is Eligible for the ERTC Program?
The ERTC program does not discriminate against various types of businesses as long as they can demonstrate that the pandemic marred their operations. Whether you run a private enterprise or a tax-exempt organization, you will only need to prove that one of the following criteria is true for you:
- Your business saw a gross decline in receipts amounting to 50 percent or more in any quarter of the year 2020 compared to the corresponding quarter from 2019, or it experienced a 20 percent drop in 2021 compared to the same quarter in 2019.
- Your business was forced to suspend its operations, whether partially or fully, as a result of federal, state, or local pandemic management policies and edicts.