With rising inflation and economic uncertainty, businesses worldwide struggle to manage operations while keeping employees on the payroll. Looking for every opportunity or benefit for your business should be a top priority, especially for start-ups. As a start-up business, you may not believe you have the time and effort available to research and apply for these credits, which could be detrimental to your firm.
The Employee Retention Tax Credit (ERTC) is that help that many start-ups created over the past few years could very well need. It was introduced by the Department of Treasury and Internal Revenue Service in early 2020. If you run a start-up, you should consider getting assistance from the government by applying for the ERTC – as other businesses have taken advantage of it.
We will explore everything you need to know about this tax credit and how your start-up can apply.
What Is the Employee Retention Tax Credit?
The Employee Retention Tax Credit is a tax credit introduced in the wake of the pandemic to incentivize business owners who kept their employees on the payroll in 2020 and 2021.
Provisions for the tax credit were introduced in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and empowered by Congress and the IRS. If your business placed employees on the payroll during this period, you should consider claiming the ERTC.
How Does the Employee Retention Tax Credit Work?
The ERC aims to reward recovery start-up businesses (RSUB) launched after February 2020. When the tax credit was initially introduced, employers could claim 50% of all qualified wages paid to employees of up to $10,000. This meant that employers could claim up to $5,000 for each employee for 2020.
Congress capped the quarters that businesses can be eligible for the ERTC ranging from the second quarter of 2020 to the third quarter of 2021. However, the Consolidated Appropriations Act (CAA) enacted in December 2020 and the American Rescue Plan Act (ARPA) enacted in March 2021 amended the provisions for start-ups to claim the credit.
We will explore all the details below.
Who Is Eligible for the Employee Retention Tax Credit?
According to the provision for the tax credit, eligibility includes:
- Recovery start-up businesses: These are businesses that launched after February 15th, 2020, with annual gross receipts not exceeding $1 million. If your start-up business was established after that date, you could apply for the ERTC.
- Employers with 100 or fewer full-time employees in 2020 and 500 in 2021: If you have 100 or fewer employees in 2020 and 500 or fewer in 2021 on the payroll during the pandemic season, you can claim the ERTC. It does not matter whether your business was operational or not during that season.
- A partial or complete suspension of operations: You can claim the credit if your business operations were partially or fully suspended due to a local, state, or federal decree. For instance, if you were to shut down your physical restaurant but run a food delivery service, you may be eligible for the ERTC.
How Much Is the Employee Retention Tax Credit for Start Ups?
The provision in the ARPA states that start-ups can access up to 70% of paid wages to employees for Q3 and Q4 of 2021.
Let us break it down.
Say you launched a start-up in May of 2020 with three employees paid $5,000 every month. You can claim up to 70% ($3,500) per employee for Q3 and Q4 2021. This means you can claim $21,000 for all three employees for both quarters of 2021.
But there is a caveat to the provision. If the total amount to claim is higher than the $50,000 capped amount per quarter, your business will only claim the capped amount. Consider these examples:
If your start-up business has ten workers earning $7,000 each, the tax credit to claim will be $4,900 for each employee per quarter.
Thus, the total amount to claim per quarter is $49,000. Therefore, your business will receive $98,000 as it is lower than the capped amount of $50,000 per quarter.
If your start-up hires 20 workers earning $5,000, the tax credit to claim will be $3,500 per employee per quarter.
Thus, the total amount for all 20 workers will be $70,000 per quarter. Since that amount is higher than the capped amount of $50,000, your business will only claim $50,000 per quarter.
Therefore, your business will receive $100,000.
How Can Your Business Claim the Employee Retention Tax Credit?
You will need the following information and documents to apply for the ERTC:
- Form 941 (Employer’s Quarterly Federal Tax Return)
- Rundown of quarterly revenue
- Location of business and number of employees
Beyond these documents, applying for the credit is complex and mentally tasking. You will need an expert consultant and CPA to guide you through the process to claim the credit successfully.
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