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- June 9, 2023
What is the Employee Retention Credit (ERC) and How to Claim It in 2023?
Due to severe impact on the economy, caused by the COVID-19 pandemic, many businesses have confronted significant financial challenges. In response, the U.S. government introduced a range of measures designed to support businesses during these trying times. A standout amongst these initiatives is the Employee Retention tax Credit (ERC) or (ERTC).
The ERC is a refundable tax credit aimed at encouraging businesses to keep their employees on the payroll despite the economic downturn. It’s aim is to assist both, businesses and employees, fostering economic stability and recovery from financial stress during the pandemic.
The Purpose of ERC
The key objective of the ERC is to assist businesses during the pandemic financially, ensuring their continuity and preventing widespread layoffs.
This relief initiative operates by providing a credit on the employer’s quarterly payroll tax return, thereby reducing their tax burden and providing much-needed financial respite.
Who Can Benefit from ERC?
The beauty of the ERC lies in its accessibility. It is designed to benefit a broad range of businesses, with its eligibility criteria capturing both small and large-scale operations. Some key benefactors of the ERC are businesses that:
- Have W-2 Employees
- Faced a complete or partial halt in activities as a result of a government directive associated with the COVID-19 pandemic.
- Suffered a notable drop in total income during any quarter within a specific year, when juxtaposed with the corresponding quarter of a preceding year.
- Have a specific number of full-time employees in a particular year
The Eligibility Criteria
Navigating the eligibility criteria is crucial to determining whether your business can benefit from the ERC. To qualify, a business must:
- Employ W-2 workers. Businesses that only hire 1099 contractors are ineligible.
- Experienced a decrease in total earnings exceeding 50% during any quarter of 2020, and over 20% in any quarter of 2021, when assessed against the same quarters in 2019.
- Operated under a full or partial suspension due to a government order related to COVID-19.
- Have a specified number of full-time employees in a given year. The maximum number allowed varies by year.
The Impact of ERC
The ERC has made an extensive impact on the businesses that availed of it. By offsetting a portion of employment costs, the ERC has been instrumental in helping businesses keep their doors open, preserving jobs that might have otherwise been lost. The ERC is more than a financial aid program; it is a crucial lifeline supporting the heart of our economy – the businesses and their employees.
How Does the ERC Work?
The ERC operates by reducing the employer’s payroll tax liabilities. Let’s illustrate this with an example:
Suppose you have a business that employs 20 full-time W-2 employees. In 2023, the ERC might be equal to, for instance, 60% of qualified wages paid to employees during a quarter, up to a limit of $7,000 per employee per quarter. This implies the maximum credit amount per employee would be $7,000 per quarter. Therefore, if you pay each employee the maximum qualified wages, you could claim up to $140,000 ($7,000 x 20 employees) in ERC per quarter.
What ERTC Filing Documents Do I Need?
Claiming the ERC is a process that requires diligent record-keeping. Here’s a list of documents you’ll need to file:
- Form 941: Employer’s Quarterly Federal Tax Return. This form is amended to claim the credit.
- Documentation of wages paid to each employee during the quarter. This includes both cash compensation and the cost of employer-provided health care benefits.
- Evidence of any governmental orders related to COVID-19 causing a full or partial suspension of your business operations.
- Records of gross receipts for each quarter of the current and previous years for comparison.
Remember, maintaining accurate records is crucial to support your ERC claim.
Your 2023 Eligibility: Can You Still Claim ERTC?
Even though the ERTC officially expired on October 1, 2021, eligible businesses can continue to benefit from this provision in 2022 and 2023.
If you didn’t file for the credit previously, you have the option to file retroactively for an ERTC refund. To do this, you’ll need to complete and submit Form 941-X, known as the Adjusted Employer’s Quarterly Federal Tax Return. It’s also known as the Claim for Refund.
Keep in mind there’s a three-year window from the date of your original filing to submit this form. So, the clock is ticking, but the opportunity to claim your credit still stands.
How to Claim the Employee Retention Credit in 2023
While the exact process to claim the ERC in 2023 will depend on any changes the IRS makes to the process, based on previous years, the general process would likely follow these steps:
Step 1: Determine Eligibility
As with previous years, it’s critical to first ensure that your business for eligible. Remember to check for any changes to the eligibility criteria for 2023.
Step 2: Calculate Your Credit
Once you’ve determined your eligibility, you’ll need to calculate the credit amount. This requires you to determine the qualified wages paid to each eligible employee during the applicable quarter. To calculate this correctly, it’s better to consult professional as small errors can lead to significant differences in the credit amount.
Step 3: File Your Claim
The credit is claimed on Form 941, the Employer’s Quarterly Federal Tax Return. If the credit amount is more than your payroll tax liability for the quarter, the surplus can be claimed as a refund.
Remember, you cannot claim the credit on wages paid with forgiven PPP loan funds.
Step 4: Maintain Accurate Records
You must keep meticulous records of the wages paid to each employee during the applicable quarter. You should also maintain records of any government orders or other documentation proving your eligibility for the credit.
Step 5: Consult With Professionals
Navigating the complexities of the ERC can be daunting, and it’s recommended to seek professional assistance to ensure you’re maximizing your credit and complying with all requirements. At CROWNGLOBE, our team of experienced professionals is ready to assist you in this process, ensuring you can claim the maximum credit your business is entitled to.
Conclusion
In a challenging economic landscape, the Employee Retention Credit offers a vital lifeline to businesses, helping them retain their employees and navigate through these trying times. The process of claiming this credit involves several steps:
- Understanding the eligibility criteria
- Calculating the credit amount
- Filing the appropriate forms
- Keeping meticulous records
While it may seem daunting, remember that help is available. At CrownGlobe, we’re on standby, ready to walk you through the entire process. Our team of ERC experts is highly skilled and efficient. They will ensure that you benefit maximally from the program while adhering to all rules and regulations.
Let go of the intricacies to us and we will manage the rest. After all, your time is better spent on what you truly love – steering your business to greater heights.
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