Understanding the Employee Retention Credit

Employee retention credit is a tax break that may be available to small business owners (ERC). Companies who maintained a staff during the COVID-19 outbreak can claim this refundable tax credit.

You are not alone if this is the first time you’ve heard of the ERC. As of 2021, only 32% of small business owners were at least somewhat familiar with the credit, according to the National Federation of Independent Business.

Those small enterprises that qualify for the ERC still have time to submit an application. However, ERC regulations might be difficult to navigate.

What follows is an explanation of the ERC and a guide to figuring out whether or not you qualify for the credit.

Employee Retention Credit (ERC): What Is It?

Under the Coronavirus Aid, Relief, and Economic Security Act, the ERC was originally established in 2020 as a refundable tax credit (CARES Act). As the COVID-19 pandemic spreads, this loan was established to assist businesses in maintaining their payrolls.

The credit has undergone a number of modifications and eligibility expansions since then and is now available to businesses that have taken out loans through the Paycheck Protection Program (PPP). Generally speaking, the ERC can be claimed by qualified employers for wages provided to workers between March 13, 2020, and September 30, 2021.

In what range of amounts might the ERC provide funding for you? The sum is contingent upon the time of year in which a claim is submitted.

For the 2020 tax year, qualifying firms can claim a credit of up to $5,000 per employee for 50% of qualified salaries paid between March 13, 2020, and December 31, 2020. The ERC in 2021 is capped at $21,000 per worker and is determined by taking 70% of eligible salaries, up to a quarterly maximum of $7,000.

How to Find Out If You Can apply for the ERC

You must determine your eligibility for the ERC for both 2020 and 2021, as the standards are different.

Eligibility in the Year 2020

In 2020, you will be able to apply for the ERC if you meet the following criteria:

• In Q2, Q3, or Q4 of 2020, your revenue dropped by at least 50% when compared to the corresponding period in 2019; or
• You had to halt or curtail some or all of your business activities during a specific calendar quarter because of government restrictions on trade, travel, or gatherings because of the COVID-19 pandemic.

Eligibility in the Year 2021

In the year 2021, the ERC will be awarded to those who meet the following criteria:

• During any calendar quarter, your company was forced to completely or partially cease operations due to government directives restricting commerce, travel, or group gatherings because of the COVID-19 pandemic; or
• In comparison to the same calendar quarter in 2019, your company’s gross receipts dropped by 20% in either Q1 or Q2 of 2021.

Qualification under the gross receipts test can be less complicated as it relies on hard data to determine eligibility. Eligibility under the full or partial suspension test relies on subjective factors that the IRS may contest.

A further perk of using gross receipts is that you will be eligible for the ERC in the next quarter. Only the time during which a government order had a material impact on your firm will count toward eligibility under either the full or partial suspension test.

Startups in Need of a Recovering Economy Can Apply to the ERC

The ERC program has been extended for eligible starting enterprises in the recovery sector through the third and fourth quarters of 2021. A recovery startup business is one that:

• Commenced operations after February 15, 2020.
• Have a yearly gross income of less than $1 million on average.
• Does not make the cut for either the full or partial suspension or the gross receipts for the quarter.

Each of the third and fourth quarters of 2021 has a maximum ERC of $50,000 for recovery beginning firms.

Estimating Your Qualified Wages

Your ERC entitlement is computed based on “qualified wages.” Wages paid to employees that were subject to Social Security and Medicare withholding taxes are considered qualified wages, as are any health plan charges that are attributable to those wages.

However, not all income is taxed. This includes income that was utilized to qualify for PPP loan forgiveness or for credits or relief under the FFCRA, the ARA, or the WOC (WOTC).

Wages paid to persons who own more than 50% of the business and to those who are related to the employer, including the employer’s spouse, also don’t qualify.

How to Claim Your ERC

If you qualify for the ERC, you must submit Form 941-X to revise your original Form 941 (Employer’s Quarterly Federal Tax Return). Form 941-X adjustments must be submitted within three years of the original Form 941 filing date.

It may be worthwhile to investigate your company’s ERC eligibility if you haven’t already done so.

Do you want to know if your company can apply for the ERC, but you’re not sure if it qualifies Consult with a tax or accounting professional, as well as an ERC specialist, for assistance.