For over 18 months, the world was held on a standstill by a pandemic that threatened how we conduct business. At the height of the menace, some firms struggled with staying afloat and had to close up shop. However, other companies adapted hybrid offices to remain in operation.
Now, with the world gradually tilting towards normalcy, it is essential to note that Congress is introducing new business taxes, and you should prepare your business for them. More so, it is necessary to note that the government has introduced tax credits that will benefit your business.
In this article, we will explore everything you need to know about the Employee Retention Credit (ERC) and how to see if you qualify for it.
What Is the Employee Retention Credit?
The Employee Retention Credit is one of the few tax credits introduced by the Department of Treasury and Internal Revenue Service to help small businesses bounce back. It is a refundable tax credit reimbursing business owners for the qualified wages paid to their employees during the pandemic.
This tax credit is from the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to help employers in the private sector. If you were not opportune to claim other tax credits before, this could be an opportunity for you.
If your business was in operation or kept your employees on the payroll, you should claim the ERC.
One of the primary aims of the ERC is to encourage small business owners to keep their workers on the payroll – even if the business was not in operation due to COVID lockdown protocols. In a previous article, we discussed the ERC and how you can benefit from it. We also addressed how small business owners who were denied the PPP loans could also apply for the ERC seamlessly.
There has been an update since then. The 2020 Taxpayer Certainty and Disaster Tax Relief Act, part of the Consolidated Appropriations Act signed at the end of 2020, extended the ERC’s scope for eligibility for the whole of 2021.
There is another tax credit called the Paid Leave Tax Credit. This credit reimburses business owners for paid medical and family leave due to COVID-related issues. If any of your workers were on the payroll while being vaccinated, quarantining, or waiting for the COVID test results, you qualify for this tax credit.
How Much Is the ERC?
Initially, the ERC was calculated up to 50% of qualified wages of up to $10,000 paid to employees between March and December 2020. It was meant for small businesses with 100 or fewer employees. Notably, the ERC was limited to $5,000 per employee. Therefore, all wages paid to your workers during the qualification make you eligible for the credit.
However, some amendments have been made this year. The ERC increased its provisions for qualified wages from 50% to 70%. The limit was also increased from $5,000 for the whole year to $7,000 per quarter. This development means you can claim up to $21,000 per employee for the 1st, 2nd and 3rd quarters of 2021 – as opposed to the previous $5,000. The employee limit was also increased from 100 to 500 employees. These changes allow more businesses to qualify for the ERC.
What Qualifies You for the ERC?
If you own a small business with 500 or fewer employees on the payroll but were not working for some parts of 2021, you qualify for the ERC.
If your gross receipts faced a decline of more than 20% in 2021 compared to the previous year, you are eligible for the credit. Additionally, you qualify for the ERC if your business had a full or partial suspension of operations during any calendar quarter because of governmental orders limiting commerce, travel or group meetings due to COVID-19.
Let us break it down:
To qualify for the ERC in 2020, your gross receipts decline must be more than 20% compared to 2019. Thus, you get to claim 50% of your qualified employee wages of up to $5,000. Now, in 2021, if the decline of the gross receipt is more than 20% compared to 2020, you can claim 70% (quarterly) of your employee wages of up to $21,000.
If your business had not been established in 2019, there is no cause for alarm. You can simply compare your quarterly gross receipts with your 2020 gross receipts for eligibility status.
As long as your business
- Was fully or partially suspended due to COVID lockdown protocols
- Placed workers on the payroll during this period.
- Experience a decline in gross receipts compared to the previous year.
Then you can apply for the credit.
How Do You Apply for the ERC?
The following information is needed to claim the Employee Retention Credit:
- Rundown of quarterly revenue
- Quarterly payroll tax returns
- Location of business and number of employees
- Rundown of lines of business, including products and services.
- Details of wages that were paid to employees for the time not working.
To see if you qualify or if you have any further questions head over to EvolvedERC.
You can also reach out to us to see how we can help your business reduce expenses while boosting your profits.
Published by Marc Freedman
Marc currently serves as our Chief Cost Evaluator, expertly advising our client management team on how to help you successfully achieve your business and financial growth goals. A respected mentor to all he consults with, he is an avid collaborator and contributor to the spend consultant community, guiding thought leaders to formulate, design, and install the best operational solutions available to their clients.