Employers who qualify and were impacted by the COVID-19 pandemic may claim the employee retention credit (ERC), a tax benefit. The ERC offers a tax credit of up to $7,000 per employee for wages received between March 13, 2020, and December 31, 2021, with the goal of encouraging firms to keep their workers. This post will explain the employee retention credit calculation process and provide some associated information.
Employers submit Form 945 every year to report federal income tax withheld from nonpayroll payments including pensions, annuities, and wins from gambling. Employee retention credits must be reported on Forms 941 or 944, not Form 945, by employers who qualify for them.
Some firms are required to submit Form 720, a quarterly excise tax return, in order to report and pay excise taxes. The Form 720 does not include a report of the Employee Retention Credit.
Employers report salaries paid, tips received, and federal income tax, Social Security tax, and Medicare tax taken from employees’ paychecks on Form 941, which is a quarterly tax return. Employers record their federal unemployment tax liability on Form 940, a yearly tax form. On Form 941, the employee retention credit is reported.
Eligible companies must first ascertain the qualified pay of their employees before calculating the employee retention credit. Wages paid to employees within the specified time period that comply with specific requirements are referred to as qualified wages. Qualified wages for firms with an average of 500 or less full-time workers in 2019 include pay made to workers regardless of whether they rendered services. The only salaries that qualify as qualified wages for firms with an average of more than 500 full-time employees in 2019 are those that were paid to workers who did not perform any services.
Employers can compute the amount of the employee retention credit once qualified salaries have been determined. 50% of qualifying wages, up to a total of $10,000 per employee for the whole defined time period, are eligible for the credit. The maximum credit per employee is therefore $5,000.
In conclusion, for qualified employers impacted by the COVID-19 pandemic, the employee retention credit is an important tax incentive. Employers must assess their eligible salaries and use the credit rate of 50% to calculate the credit. Form 941 or Form 944 are the only forms that report the credit; Form 945 or Form 720 do not. To make sure they are entitled for the credit and to accurately determine the credit amount, employers should speak with a tax expert.