Did you know you could get a refund for the Social Security and Medicare taxes you’ve paid on your employees’ wages?
Every decision is a profit decision. So you want to make sure you’ve got all your bases covered when it comes to making business decisions. One of the ways you can make it through these challenging times is by taking advantage of the Employee Retention Credit.
What is Employee Retention Credit?
The Employee Retention Credit is a new credit that came out of the CARES act. The federal government put it in place to try to keep employees employed. They are giving employers money back to ensure this.
The credit is basically a refund of the Social Security and Medicare taxes you have paid on your employees’ wages.
Businesses that Qualify for ERC:
- Small business with less than 100 employees but with W-2 payroll
- If the government shut your industry down in some form or fashion
- If you made 50% less in gross receipts over the same quarter in the prior year (in 2021, this dropped to 20%)
This credit is happening in the payroll process, not in the income tax return. This means that no one needs to worry about it having an impact on their income tax return.
The ERC Formula
The ERC is based on a formula. First, remember that you can't include payments to business owners and family members.
So here’s how it works:
You get to take 50% of the wages for your employees. However, the cap is at a $10,000 wage. This is up to a $5,000 credit in 2020 for every employee which means you get $5,000 per employee if they all made $10,000. For example, if you have 10 employees, you get a credit of $50,000.
The $5,000 cap applies to the combination of all the quarters in 2020. In 2021, the credit cap has been changed to $7,000 (which is 70% of your wages) per quarter.
To get the credit, you need to amend Form 941, which is your employer’s quarterly tax return. If you have an overpayment on your Form 941, you can elect to either apply it to a future quarter or refund it.
If you want to learn more about the Employee Retention Credit, check out Episode 061: Understanding The Employee Retention Credit.