For some business owners struggling to make ends meet during the coronavirus crisis, a tax credit like the Employee Retention Credit might be more easily accessible than other popular relief options, like loans and grants.
If you’re not quite sure how tax credits work, you’re not alone. Read on to learn more about available tax credits and use our Tax Credit Estimator to calculate your potential savings.
What is the Employee Retention Credit, and why is it important for business owners?
The Employee Retention Credit (ERC) is a refundable tax credit intended to encourage business owners to keep their employees on the payroll and minimize the number of workers filing for unemployment benefits. The tax credit is equal to 50% of qualified wages that eligible employers pay their employees in a calendar quarter. Qualified employers can earn a maximum credit of $5,000 per employee.
Unlike Paycheck Protection Program (PPP) loans and other small business relief options, businesses of all sizes are eligible to receive the ERC. And because the ERC is not a loan, recipients will never need to repay or seek forgiveness for ERC funds.
Calculating your ERC amount can get a little complicated. Don’t worry, we’ll walk you through it. Use our Tax Credit Estimator to calculate your potential ERC amount.
How to calculate the Employee Retention Credit
The Employee Retention Credit is equal to 50% of qualified employee wages paid in a calendar quarter. The credit applies to wages paid after March 12, 2020, and before January 1, 2021. Eligible wages per employee max out at $10,000, so the maximum credit for eligible wages paid to any employee during 2020 is $5,000.
The calculations can be tricky. Our Tax Credit Estimator above takes care of the estimation for you. Here’s what you need to do:
1. Confirm whether you had employees at some point in 2020.
If you have not employed any workers in 2020, you’re not eligible for the ERC. You may still qualify for paid leave credits. Keep going!
2. Establish whether you received a PPP loan.
If so, confirm whether you repaid your PPP loan on or before May 18, 2020. If you received a PPP loan and did not repay your loan on or before May 18, you are not eligible to claim the ERC. However, you may still qualify for paid leave credits. Keep going!
3. Compare business revenue in 2019 to 2020.
To help determine if you qualify for the ERC, the tool will ask you to compare your business revenue for the same calendar quarter in 2019 to 2020. Confirm whether your revenue has dropped by more than 50%. If you’re not sure, the tool will help you estimate this.
If revenue hasn’t dropped by more than 50%, you may still qualify for the ERC if your business operation has been partially or fully suspended due to government orders limiting commerce, travel, or group meetings due to COVID-19.
If revenue hasn’t dropped sufficiently and your business operations haven’t been partially or fully suspended for these reasons, you’re not eligible for the ERC. But you may still qualify for paid leave credits. Keep going!
4. Enter qualified wages paid to all employees not working due to COVID-19.
Next, enter qualified wages paid to all employees not working due to COVID-19 between March 13 and June 30, 2020. Qualified wages are wages and health plan expenses paid for time that an employee is not working due to your economic hardship.
5. Learn more about your estimated Employee Retention Credit.
And find out how you can claim your credit.
Additional tax credits you may qualify for
Regardless of whether you qualify for the ERC, you may still qualify for paid sick leave and paid family leave tax credits or the Social Security tax deferral. Our Tax Credit Estimator walks you through these estimations.
Emergency Sick Leave Tax Credit
If your employees take sick leave for themselves or to care for others due to COVID-19, you may qualify for the Emergency Sick Leave Tax Credit. Our Tax Credit Estimator estimates this credit for you. You need to know the amount of:
- Sick leave wages paid to employees between April 1, 2020, and June 30, 2020
- Sick leave wages paid to employees who took time off to care for others between April 1, 2020, and June 30, 2020
- Qualified sick leave health plan expenses paid between April 1, 2020, and June 30, 2020
- Family leave wages paid between April 1, 2020, and June 30, 2020
- Qualified health plan expenses paid between April 1, 2020, and June 30, 2020
Social Security tax deferral
You may be eligible to defer 50% of your Social Security tax payments, or 6.2% of wages. Our Tax Credit Estimator estimates the deferral for you. Here’s what you need to know:
- Whether your business is a railroad employer
- 2020 average total salaries or yearly wages OR 2020 estimated Social Security tax due
- How many employees you have on the payroll today
On the final page of the Tax Credit Estimator, you’ll receive a summary of your estimated Employee Retention Credit, Emergency Sick Leave tax credits, and Social Security tax deferral payments. You’ll also get information about how to claim your tax credits and apply for deferrals.
How do I claim an Employee Retention Credit?
Eligible employers can receive a current cash benefit to fund qualified wages in one of two ways.
- By reducing the employment tax deposits they are otherwise required to make
- By filing a claim for an “advance refund” of the credit that is anticipated for a given quarter
Here’s how it works:
- If you deposit federal employment taxes weekly or semi-weekly, you can reduce the tax deposits by the credit amount that applies to the qualified wages for that pay period.
- If your credit amount is greater than your total employment tax deposits for the pay period or you didn’t reduce the tax deposits, you can get an advance refund of the credit using Form 7200. You can file this form multiple times throughout the quarter.
- When you file Form 941 quarterly, you can check your credit amount against the tax deposits already made during the quarter. If there is still credit left, it will be refunded once you file this form.
Remember, you can file for this credit quarterly, so check back here to estimate your credit amount for the next calendar quarter.
What is the ERC deadline?
The Employee Tax Credit is available through December 31, 2020. The credit applies to qualified wages paid to employees after March 13, 2020, and before January 1, 2021.
Where can I learn more about the ERC?
Find out what you need to know about the ERC from the U.S. Department of Treasury.
Download a quick guide to the ERC from the U.S. Chamber of Commerce.
Compare the Employee Retention Credit to the Paycheck Protection Program in the QuickBooks Resource Center.