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The Employee Retention Credits (ERC) are tax credits available to a wide range of businesses during the 2020 and 2021 calendar years that were designed to incentivize and enable employers keep their workers on payroll during the pandemic. These credits may be claimed retroactively if you satisfy the eligibility criteria described below.
The ERC offers a “fully refundable” tax credit for eligible employers. The ERC is taken on the employer portion of social security taxes, but if the credit is greater than social security taxes owed, the remaining amount will simply be paid directly (aka “fully refunded”) to employers. The ERC equals 70% of qualified wages in 2021, and up to 50% of qualified wages in 2020. Qualified wages are defined as follows:
Note that special rules apply for new small business that started after February 15, 2020 — they may be eligible to get even larger ERC amount per quarter and to receive the credits for all four quarters of 2021.
Legislation passed in 2021 newly made the ERC available to businesses that took a loan under the Paycheck Protection Program (PPP), including first-round PPP borrowers who originally were ineligible to claim the tax credit; however, the credit can only be taken on wages that will not be forgiven under PPP.
Businesses are eligible to take this credit during any quarter in which either of the following conditions apply:
Employers can take advantage of this credit when filing federal tax returns with IRS form 941 for non-farms or 943 for farms (or form 941-X or 943-X to claim the credit for previously filed quarters), and/or by using IRS form 7200 to claim a refund (aka “advance payment”). See this IRS webpage and this FAQ page for more details on the ERC and how to claim the credit; however, note that the content in both pages has not been updated (refer to the links at the top of the page for up-to-date ERC guidance).
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